    [JPRT, 111th Congress]
    [From the U.S. Government Publishing Office]

                         CONGRESSIONAL OVERSIGHT PANEL

                           JANUARY OVERSIGHT REPORT *

                                   ----------

         EXITING TARP AND UNWINDING ITS IMPACT ON THE FINANCIAL MARKETS

                     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    January 13, 2010.--Ordered to be printed

        * Submitted under Section 125(b)(1) of Title 1 of the Emergency
            Economic Stabilization Act of 2008, Pub. L. No. 110-343

             CONGRESSIONAL OVERSIGHT PANEL JANUARY OVERSIGHT REPORT

                         CONGRESSIONAL OVERSIGHT PANEL

                           JANUARY OVERSIGHT REPORT *

                                   __________

         EXITING TARP AND UNWINDING ITS IMPACT ON THE FINANCIAL MARKETS

                     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                    January 13, 2010.--Ordered to be printed

        * Submitted under Section 125(b)(1) of Title 1 of the Emergency
            Economic Stabilization Act of 2008, Pub. L. No. 110-343

                                   ----------
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    54-422 PDF                       WASHINGTON : 2010

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                         CONGRESSIONAL OVERSIGHT PANEL
                                 Panel Members
                            Elizabeth Warren, Chair
                                 Paul S. Atkins
                               Richard H. Neiman
                                 Damon Silvers
                               J. Mark McWatters
                                C O N T E N T S

                                  ----------
                                                                       Page
    Executive Summary................................................     1
    Section One: January Report......................................     3
        A. Overview..................................................     3
        B. The Various Stages of ``Exit'' from the TARP..............     4
            1. Secretary's Authority and Obligations.................     4
            2. Other Oversight and Management Entities...............     7
            3. Effect on Other Related Programs......................     8
            4. EESA Requirements Relating to Use of TARP Profits, or
              Approach to TARP Losses................................     9
            5. Continuing Market Effects of the TARP: The Implicit
              Guarantee..............................................    10
            6. Certain Tax Issues Affecting TARP Exit................    12
        C. Historical Precedents: the RFC and the RTC................    16
            1. The RFC...............................................    17
            2. The RTC...............................................    19
            3. Lessons from the RFC and the RTC......................    20
        D. Disposal of the Assets....................................    21
            1. Introduction..........................................    21
            2. Treasury's TARP Exit Strategy.........................    22
            3. Accounting for the TARP...............................    26
            4. CPP Preferred and Warrants............................    27
            5. Citigroup.............................................    38
            6. AIG...................................................    51
            7. Chrysler and GM.......................................    68
            8. GMAC..................................................    81
            9. PPIP..................................................    84
            10. TALF.................................................    86
            11. Small Business Programs..............................    88
        E. Unwinding TARP Expenditure Programs.......................    91
            1. HAMP..................................................    92
            2. Future Considerations.................................    95
        F. What Remains and What Additional Assets Might Be Acquired?    96
        G: Unwinding Implicit Guarantees in a Post-TARP World........    98
            1. Regulatory Options....................................    98
            2. Liquidation and Reorganization........................   105
            3. International Aspects of Reform.......................   109
            4. Proposed Legislation..................................   110
        H. Conclusions and Recommendations...........................   116
    Section Two: Additional Views....................................   119
        A. Damon Silvers.............................................   119
        B. J. Mark McWatters and Paul S. Atkins......................   121
    Section Three: Correspondence with Treasury Update...............   133
    Section Four: TARP Updates Since Last Report.....................   134
    Section Five: Oversight Activities...............................   153
    Section Six: About the Congressional Oversight Panel.............   154
    Appendices:
        APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR
          ELIZABETH WARREN, RE: STRESS TESTS, DATED DECEMBER 10, 2009   155
        APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY
          TIMOTHY GEITHNER, RE: EXECUTIVE COMPENSATION, DATED
          DECEMBER 24, 2009..........................................   160
        APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY
          TIMOTHY GEITHNER, RE: CIT GROUP ASSISTANCE, DATED JANUARY
          11, 2010...................................................   167
    ======================================================================

                            JANUARY OVERSIGHT REPORT

                                    _______

                    January 13, 2010.--Ordered to be printed

                                    _______

                              EXECUTIVE SUMMARY *

    ---------------------------------------------------------------------------
        * The Panel adopted this report with a 5-0 vote on January 13,
    2010.
    ---------------------------------------------------------------------------
        In its December oversight report, the Panel reviewed the
    successes and failures of the Troubled Asset Relief Program in
    2008 and 2009. This month, the Panel focuses on the road ahead
    as Treasury closes the TARP. Now that Treasury has acquired
    hundreds of billions of dollars in assets, how does it plan to
    unwind its stake in the financial markets? How will Treasury
    balance its desire to sell these assets quickly with its goals
    of promoting financial stability and strengthening the return
    to taxpayers? What steps will Treasury take to unwind the
    implicit guarantee that the federal government will always
    stand behind too big to fail banks? In short, what is
    Treasury's exit strategy?
        Ending the TARP will involve several stages of exit. The
    first milestone will be on October 3, 2010, when Treasury's
    authority to make new commitments to purchase assets, commit
    funds, and establish guarantees using TARP funds will expire.
    The end of this authority will not, however, constitute the end
    of the TARP; Treasury will be authorized to continue making
    purchases using funds that were committed in advance of the
    October 3, 2010 deadline. Finally, after Treasury completes all
    of its TARP purchases, it will hold a massive pool of financial
    assets likely worth hundreds of billions of dollars, and the
    process of unwinding some of these holdings may continue for a
    number of years.
        As of December 31, 2009, Treasury's largest TARP-related
    assets include $58 billion in preferred securities issued by
    banks, $25 billion in Citigroup common stock, $46.9 billion in
    AIG preferred stock, and $61 billion in shares and debt of GM
    and Chrysler. Treasury also holds significant assets under the
    Public-Private Investment Program, the Term Asset-Backed Loan
    Facility, and the Capital Purchase Program, and it has
    announced plans to purchase further assets under new programs
    such as the small business initiative.
        The Emergency Economic Stabilization Act authorized
    Treasury to hold its TARP assets until maturity or to sell them
    earlier. Treasury has articulated three principles that guide
    its determination of when to sell assets: maintaining the
    stability of the financial system, preserving the stability of
    individual financial institutions, and maximizing the return on
    the taxpayers' investment.
        These principles may sometimes be at odds with one another.
    For example, the most profitable moment to sell a TARP asset
    may not be the moment that best promotes systemic stability or
    the moment that best serves a particular institution.
    Furthermore, Treasury is only one department of a much larger
    federal government, and the broader government may have
    additional goals for the TARP, such as preserving jobs or
    satisfying a political constituency.
        The Panel is also concerned that, although Treasury has
    been consistent in articulating its principles, the principles
    as announced are so broad that they provide Treasury with a
    means of justifying almost any decision. This means that there
    is effectively no metric to determine whether Treasury's
    actions met its stated goals. Because any approach may
    alternatively be justified as maximizing profit, or maintaining
    the stability of significant institutions, or promoting
    systemic stability, almost any decision can be defended.
    Measuring Treasury's success against these metrics is
    problematic.
        As Treasury enters the next stage of its administration of
    the TARP, it must learn from the mistakes it has made in the
    past--in particular, its failure to follow the money used to
    bail out large financial institutions. Because Treasury never
    required the institutions that received the first infusions of
    TARP funding to account for their use of these funds, taxpayers
    have not had a clear understanding of how their money has been
    used. As Treasury embarks on new programs, it must require that
    future recipients provide much greater disclosure of their use
    of TARP dollars.
        Finally, and perhaps most significantly, the TARP has
    raised the long-term challenge of how best to eliminate
    implicit guarantees. Belief remains widespread in the
    marketplace that, if the economy once again approaches the
    brink of collapse, the federal government will inevitably rush
    in to rescue financial institutions deemed too big to fail.
    This belief distorts prices, giving large financial
    institutions an advantage in raising capital that mid-sized and
    smaller banks--those not too big to fail--do not enjoy. These
    implicit guarantees also encourage major financial institutions
    to take unreasonable risks out of the belief that, no matter
    what happens, taxpayers will not allow their failure. So long
    as markets continue to believe that an implicit guarantee
    exists, moral hazard will continue to distort prices and
    endanger the nation's economy, even after the last TARP program
    has been closed and the last TARP dollar has been repaid.
                          SECTION ONE: JANUARY REPORT

                                  A. Overview

        On December 9, 2009, Treasury Secretary Timothy Geithner
    announced that the Troubled Asset Relief Program (TARP) would
    be extended until October 3, 2010.\1\ Although it may take
    years to unwind some of the assets acquired under the TARP,
    once the program expires, no new commitments may be made with
    respect to TARP funds and the end of the TARP will have begun.
    ---------------------------------------------------------------------------
        \1\ U.S. Department of the Treasury, Treasury Department Releases
    Text of Letter from Secretary Geithner to Hill Leadership on
    Administration's Exit Strategy for TARP (Dec. 9, 2009) (online at
    www.treasury.gov/press/releases/tg433.htm).
    ---------------------------------------------------------------------------
        In its December report, the Congressional Oversight Panel
    looked at the entire program in order to assess what the TARP
    has accomplished and where it has fallen short from various
    perspectives in the 14 months since its inception. This month
    the Panel looks at what the TARP will leave behind when it
    ultimately is wound down.
        The TARP will leave behind a dual legacy: hard assets and
    an even harder problem. As a result of expenditures under the
    TARP, Treasury is now managing assets that rival in size a
    substantial sovereign wealth fund. Treasury's Office of
    Financial Stability (OFS) is managing a diverse portfolio of
    assets, worth approximately $258.1 billion at December 31,
    2009, which it eventually must divest. Divesting these assets
    will call for a balance between maximizing the return to
    taxpayers, maintaining financial stability, and continuing to
    pursue other stated objectives of the TARP. There are, of
    course, also unavoidable political considerations that will
    affect these decisions, and that political context in the
    current environment can shift quickly and unpredictably.
        Devising an exit strategy from the market impact of the
    TARP and related programs is even more difficult than deciding
    how and when to dispose of the assets. The Panel has several
    times noted the moral hazard that the financial rescue created:
    the market distortion arising from the belief among market
    participants and the managers of financial institutions that
    the government will guarantee the obligations and preserve the
    shareholders of large financial institutions.\2\ Government
    intervention has created implicit guarantees of some undefined
    portion of the financial system, and any effective exit
    strategy from the TARP and related programs must address how to
    unwind or withdraw that implicit guarantee.
    ---------------------------------------------------------------------------
        \2\ See Congressional Oversight Panel, November Oversight Report:
    Guarantees and Contingent Payments in TARP and Related Programs (Nov.
    6, 2009) (online at cop.senate.gov/documents/cop-110609-report.pdf)
    (hereinafter ``COP November Oversight Report'').
    ---------------------------------------------------------------------------
        The primary focus of this report is to follow the money: To
    summarize the assets and obligations that Treasury holds or
    owes as a result of its expenditure of TARP funds, to explore
    how Treasury plans to divest itself of those assets or
    obligations and get the taxpayers' money back, and also to
    examine how the recipients intend to make sure taxpayers are
    made whole. This implicates several elements of the Panel's
    mandate, particularly the use of the Secretary's authority
    under the TARP, the effectiveness of the TARP in minimizing
    costs and maximizing benefits to taxpayers, and contributions
    to transparency.\3\
    ---------------------------------------------------------------------------
        \3\ 12 U.S.C. Sec. 5233(b).
    ---------------------------------------------------------------------------
        As examined in more detail below, Treasury has described to
    the Panel an exit strategy based on Treasury's view of sound
    asset management practices and Treasury's understanding of the
    statutory obligations imposed by the Emergency Economic
    Stabilization Act of 2008 (EESA), the law that led to the
    TARP's establishment. In this Report, the Panel discusses a
    number of questions that arise from this approach. The Panel
    notes that the publication of audited TARP financial statements
    has improved the transparency of the program and provided some
    insight with respect to the value of Treasury's holdings.
        This report also considers issues that arise with respect
    to further expenditures that may be made before the TARP
    expires; in particular under Treasury's small business
    initiatives and the continuing support provided to GMAC.
        As for the broader and still evolving issue--the unwinding
    of the implicit guarantees created by the financial rescue--the
    Panel reviews the current state of the debate and identifies
    the issues that must be addressed before it can be said that
    the TARP has been truly unwound.

                B. The Various Stages of ``Exit'' from the TARP

    1. Secretary's Authority and Obligations

        The end of the TARP will involve several stages of
    ``exit'': (1) The end of the Secretary's authority to purchase
    assets or commit funds, and to establish guarantees for
    troubled assets, on October 3, 2010; (2) the expenditure of all
    funds committed for the purpose of purchasing or supporting
    ``troubled assets,'' as defined by EESA,\4\ and (3) the
    eventual disposition of all assets held by Treasury that were
    purchased through the TARP.
    ---------------------------------------------------------------------------
        \4\ ``Troubled assets'' as defined by EESA includes both assets
    associated with mortgage-based securities and ``any other financial
    instrument that the Secretary, after consultation with the Chairman of
    the Board of Governors of the Federal Reserve System, determines the
    purchase of which is necessary to promote financial stability[.]'' 12
    U.S.C. Sec. 5202(9). Under this definition, valuable assets from
    healthy institutions may nonetheless be defined as ``troubled assets''
    under the statute if their purchase is deemed to promote stability.
    ---------------------------------------------------------------------------
        The first and most talked-about stage will come on October
    3, 2010, when the Secretary's authority to purchase troubled
    assets, or to commit funds for the purpose of purchasing
    troubled assets, will end.\5\ Originally, this authority was to
    end on December 31, 2009.\6\ The statute was written to permit
    the Secretary of the Treasury to extend the program, however,
    until October 3, 2010, provided he submitted to Congress ``a
    written certification . . . includ[ing] a justification of why
    the extension is necessary to assist American families and
    stabilize financial markets, as well as the expected cost to
    the taxpayers for such an extension.'' \7\  On December 9,
    2009, the Secretary sent such a certification to Speaker of the
    House Nancy Pelosi and Senate Majority Leader Harry Reid,
    stating his intention to exercise his authority to extend the
    TARP until October 2010.\8\ According to this certification,
    Treasury will spend the remaining months of the TARP
    ``terminating and winding down many of the government programs
    put in place last fall [2008].'' \9\ New commitments in 2010
    will be limited to the following three areas:
    ---------------------------------------------------------------------------
        \5\ See 12 U.S.C. Sec. 5230.
        \6\ 12 U.S.C. Sec. 5230(a).
        \7\ 12 U.S.C. Sec. 5230(b).
        \8\ U.S. Department of the Treasury, Letter from Secretary Geithner
    to Speaker Pelosi (Dec. 9, 2009) (online at www.financialstability.gov/
    docs/press/Pelosi%20Letter.pdf); U.S. Department of the Treasury,
    Letter from Secretary Geithner to Senator Reid (Dec. 9, 2009) (online
    at www.financialstability.gov/docs/press/Reid%20Letter.pdf).
        \9\ Id.
    ---------------------------------------------------------------------------
               Mitigating foreclosures for homeowners;
               Providing capital to small and community
            banks, and other efforts to facilitate small business
            lending; and
               Potentially increasing Treasury's commitment
            to the Term Asset-Backed Securities Loan Facility
            (TALF), a program administered by the Federal Reserve
            Bank of New York (FRBNY) and aimed at unlocking the
            credit markets via loans for the purchase of certain
            types of asset-backed and commercial mortgage-backed
            securities.\10\
    ---------------------------------------------------------------------------
        \10\ Id.
    ---------------------------------------------------------------------------
        The certification notes that ``[b]eyond these limited new
    commitments, we will not use remaining EESA funds unless
    necessary to respond to an immediate and substantial threat to
    the economy stemming from financial instability.'' \11\
    ---------------------------------------------------------------------------
        \11\ Id.
    ---------------------------------------------------------------------------
        The end of the authority to purchase assets or commit funds
    for their purchase will not, however, constitute a true
    ``exit'' from the TARP. The statute permits Treasury to commit
    funds until October 3, 2010, but spend them after that
    date.\12\ Therefore, there may be funds that have been
    committed but that, as of October 4, 2010, have not yet been
    actually spent. It is too soon to know how many such unfunded
    commitments may exist by October 3. The current state of the
    various programs under the TARP, and the amounts that could yet
    be expended, are discussed in Sections D and E.
    ---------------------------------------------------------------------------
        \12\ Under 12 U.S.C. Sec. 5216(e), the Secretary may continue to
    hold assets purchased under TARP, and may purchase or fund purchases of
    assets after the October 3, 2010 expiration date if the commitment to
    make such purchase was made by October 3, 2010.
    ---------------------------------------------------------------------------
        Even after the Secretary's authority to purchase assets has
    expired and all commitments have been funded, Treasury will
    still likely hold billions of dollars worth of assets purchased
    through the program. Treasury will have to provide for the
    management and prudent sale of these assets, which may continue
    over a number of years. Various sections of EESA contemplate
    such ongoing management and describe the structures that will
    remain in place to oversee and guide this process.
        Section 5223 of EESA contains direct guidance to Treasury
    with respect to its obligations in holding and selling assets.
    According to this section, the Secretary shall: ``hold the
    assets to maturity or for resale for and until such time as the
    Secretary determines that the market is optimal for selling
    such assets, in order to maximize the value for taxpayers'' and
    ``sell such assets at a price that the Secretary determines,
    based on available financial analysis, will maximize return on
    investment for the Federal Government.'' \13\
    ---------------------------------------------------------------------------
        \13\ 12 U.S.C. Sec. 5223(a)(2).
    ---------------------------------------------------------------------------
        Section 5216 of EESA provides specific details regarding
    Treasury's authority. This section provides that the Secretary
    ``may, at any time, exercise any rights received in connection
    with troubled assets purchased under this chapter'' and that
    the Secretary has the authority to ``manage troubled assets
    purchased under this chapter, including revenues and portfolio
    risks therefrom.'' \14\ As to the sale of troubled assets, this
    section grants the Secretary the ability to ``at any time, upon
    terms and conditions and at a price determined by the
    Secretary, sell, or enter into securities loans, repurchase
    transactions, or other financial transactions in regard to, any
    troubled asset purchased under this chapter.'' \15\ The
    proceeds from such sales as well as revenues from troubled
    assets are to be paid into ``the general fund of the Treasury
    for reduction of the public debt.'' \16\
    ---------------------------------------------------------------------------
        \14\ 12 U.S.C. Sec. 5216(a), (b).
        \15\ 12 U.S.C. Sec. 5216(c).
        \16\ 12 U.S.C. Sec. 5216(d). Treasury apparently concedes that EESA
    bars the Secretary from taking amounts Treasury receives when stock and
    warrants are redeemed and spending those amounts again, rather than
    using them to reduce the public debt (allowing section 106(d) of EESA
    to operate). However, it argues that section 118 of EESA also permits
    the Secretary to issue new government securities to raise new funds
    ``[f]or the purposes of the authorities granted in [EESA],'' including
    use to restore the TARP fund to full strength (roughly, the amount by
    which the statutory funding ceiling exceeds outstanding purchases and
    commitments). See, e.g., Congressional Oversight Panel, Questions for
    the Record for U.S. Department of the Treasury Secretary Timothy
    Geithner, at 13 (Sept. 23, 2009) (online at cop.senate.gov/documents/
    testimony-091009-geithner-qfr.pdf). The Panel takes no position on the
    validity of this position.
    ---------------------------------------------------------------------------
        While it is clear that EESA contemplates some form of
    ongoing management of TARP assets, the scope of that authority
    is less clear. For example, section 5216 permits the Secretary
    to ``exercise any rights received in connection with'' TARP
    assets, and section 106(b) authorizes the Secretary ``to manage
    troubled assets purchased under this Act, including revenues
    and portfolio risks therefrom.'' Clearly, if the Secretary
    purchased convertible preferred stock before the expiration of
    the TARP, that stock could be converted, according to its
    terms, into common equity after the TARP sunset date. The right
    to convert the stock was received in the transaction by which
    Treasury acquired the asset.
        That leaves the question of whether Treasury could exchange
    a TARP asset for anything but cash after the sunset date.
    Suppose that Treasury sought to exchange non-convertible
    preferred stock after the sunset date for common stock in the
    same institution. Such a transaction might be characterized as
    an exercise of a right ``received in connection with'' the
    original asset, but it could perhaps more appropriately be
    characterized as a means of purchasing new common equity using
    the preferred stock, depending on the facts of the situation.
        The statute provides no guidance as to whether the
    Secretary's authority to ``manage'' an asset includes using the
    stock to obtain a different class of stock, or whether such an
    exchange is permitted if it can be shown to ``reduce portfolio
    risk.'' Whether an exchange, for example, of preferred for
    common stock, can be shown to ``reduce portfolio risk'' depends
    on the facts of particular situations. Treasury has stated
    that, while it is unwilling to speculate on such hypothetical
    situations, its position is that if the February 2009 Citigroup
    exchange offer, in which preferred stock was exchanged for
    common stock in an effort to bolster the company's regulatory
    capital, had occurred after the sunset date, Treasury would
    nonetheless have the authority to engage in such a transaction
    as part of its authority to manage TARP assets.\17\
    ---------------------------------------------------------------------------
        \17\ Treasury conversations with Panel staff (Nov. 20, 2009).
    ---------------------------------------------------------------------------
        Another issue involves the conditions under which the
    Secretary may sell TARP assets. The Secretary has a statutory
    obligation to hold TARP assets until the Secretary determines
    the market for the sale of such assets is ``optimal.'' This may
    prove to be a difficult standard to apply. Without the benefit
    of hindsight, determining when a market is ``optimal'' for a
    particular sale is extraordinarily difficult. As discussed in
    greater detail below, Treasury reads this provision to require
    sales to forward the broad policy views required and implied by
    EESA. ``Optimal'' timing might therefore not be the most
    profitable, but timing that best forwards Treasury's goals. As
    also discussed in Section D.2 below, such an understanding of
    ``optimal timing'' creates certain difficulties with regard to
    oversight.

    2. Other Oversight and Management Entities

        The same section of EESA that provides the Secretary with
    the authority to create the TARP also provides for the creation
    of the Office of Financial Stability (OFS) to implement
    programs created under the TARP.\18\ The section of EESA that
    provides a sunset date for the authority granted the Secretary,
    however, explicitly excludes OFS from the sunset.\19\ No other
    section in EESA provides an alternative sunset date for OFS.
    This office will remain the primary office for the
    administration, management, and disposition of TARP assets.
    ---------------------------------------------------------------------------
        \18\ 12 U.S.C. Sec. 5211(a)(3)(A).
        \19\ 12 U.S.C. Sec. 5230(a).
    ---------------------------------------------------------------------------
        In addition, the Financial Stability Oversight Board
    (FSOB), created by EESA,\20\ will remain in existence until 15
    days after the later of either the date the last troubled asset
    purchased has been sold, or the last insurance contract entered
    into under the section to guarantee troubled assets has
    expired.\21\ Because the statute provides explicitly for the
    FSOB to continue until Treasury has fully exited from all TARP-
    related transactions, this board is clearly intended to provide
    guidance not only for the implementation of the TARP, but for
    the ongoing management and sale of TARP assets. EESA requires
    the Secretary to make monthly reports to the FSOB regarding the
    current status of TARP programs and expenditures; this
    obligation continues until the date of the FSOB's termination.
    ---------------------------------------------------------------------------
        \20\ The FSOB's members are the Secretary of the Treasury, the
    Chairman of the Board of Governors of the Federal Reserve System, the
    Director of the Federal Housing Finance Agency, the Chairman of the
    Securities Exchange Commission, and the Secretary of Housing and Urban
    Development. 12 U.S.C. Sec. 5214(b). Its duties include reviewing
    ``policies implemented by the Secretary and [the OFS] . . . including
    the appointment of financial agents, the designation of asset classes
    to be purchased, and plans for the structure of vehicles used to
    purchase troubled assets.'' 12 U.S.C. Sec. 5214(a).
        \21\ 12 U.S.C. Sec. 5214(h). For a detailed analysis of the
    programs created under Sec. 5212, please see the Congressional
    Oversight Panel's November report. COP November Oversight Report, supra
    note 2.
    ---------------------------------------------------------------------------
        The three main oversight bodies for the TARP--the Special
    Inspector General for the Troubled Asset Relief Program
    (SIGTARP), the Government Accountability Office (GAO), and the
    Panel--also have duties that extend beyond the October 3, 2010,
    sunset date. SIGTARP's oversight obligations expire on the same
    date as the FSOB terminates.\22\ GAO's obligations expire on
    the later of the date the last TARP asset is sold, or the last
    insurance contract ends.\23\ The Panel's obligations expire on
    April 3, 2011.\24\
    ---------------------------------------------------------------------------
        \22\ 12 U.S.C. Sec. 5231(h).
        \23\ 12 U.S.C. Sec. 5226(e).
        \24\ 12 U.S.C. Sec. 5233(f).
    ---------------------------------------------------------------------------

    3. Effect on Other Related Programs

        Treasury's exit from the TARP will have little to no effect
    on several programs that use TARP funds,\25\ or on other
    related programs that are also aimed at stabilizing the
    country's economy.
    ---------------------------------------------------------------------------
        \25\ One of the stated purposes of the EESA is to preserve
    homeownership, and section 109 of EESA directs the Secretary of the
    Treasury ``[t]o the extent that [he] acquires mortgages, mortgage
    backed securities, and other assets secured by residential real
    estate'' to ``implement a plan that seeks to maximize assistance for
    homeowners and use the authority of the Secretary to encourage the
    servicers of the underlying mortgages, considering net present value to
    the taxpayer, to take advantage of the HOPE for Homeowners Program . .
    . or other available programs to minimize foreclosures. In addition,
    the Secretary may use loan guarantees and credit enhancements to
    facilitate loan modifications to prevent avoidable foreclosures.'' 12
    U.S.C. Sec. Sec. 5201(2)(B), 5219(a).
    ---------------------------------------------------------------------------
        The Home Affordable Modification Program (HAMP), which aims
    to assist homeowners seeking to avoid foreclosure, will be
    largely unaffected by the end of the TARP. Treasury initially
    committed up to $50 billion in TARP funds to this program, and
    as of the release of this report, there has been no
    announcement that any additional funds have been committed. But
    more funds may be committed in the future. In Secretary
    Geithner's recent letter extending the TARP, he cited
    foreclosure mitigation as one of the areas where additional
    TARP commitments may be made in 2010. Furthermore, the $50
    billion in TARP funds already committed to HAMP may be paid out
    even after the expiration of the TARP. Because these funds are
    used to reduce homeowners' mortgage payments, there are no
    assets for Treasury to manage; therefore, no exit strategy is
    necessary.\26\
    ---------------------------------------------------------------------------
        \26\ The Panel requested from Treasury a legal opinion on its HAMP
    authority. See, e.g., Congressional Oversight Panel, COP Hearing with
    Treasury Secretary Timothy Geithner (Dec. 10, 2009).
    ---------------------------------------------------------------------------
        Two other programs that use TARP funds, the TALF and the
    Public-Private Investment Program (PPIP), will also be
    unaffected because the TARP funds that they use have already
    been committed. To the extent that the TALF and the PPIP are
    used to purchase assets, the assets are held and managed by
    private entities under the terms of the programs. Therefore,
    although OFS will have continuing oversight responsibility for
    these programs and the private entities that manage them,
    Treasury will not itself have responsibility for directly
    selling any assets purchased through these programs.
    Furthermore, both programs have their own fixed termination
    dates. Loans made under the TALF must not have a term limit
    beyond seven years and, currently, no loans may be made past
    June 30, 2010.\27\ The investment funds established under the
    PPIP have a ten-year termination date.
    ---------------------------------------------------------------------------
        \27\ Federal Reserve Bank of New York, Term Asset-Backed Securities
    Loan Facility: Terms and Conditions (Nov. 13, 2009) (online at
    www.newyorkfed.org/markets/talf_terms.html) (hereinafter ``TALF Terms
    and Conditions'').
    ---------------------------------------------------------------------------
        A small business initiative that was announced by the White
    House in October 2009 has yet to take form.\28\ But to the
    extent that it includes any outright expenditures, there will
    similarly be no requirement for an exit strategy for assets.
    This does not mitigate the need for rigorous oversight of any
    such programs.\29\
    ---------------------------------------------------------------------------
        \28\ White House, Weekly Address: President Obama Says Small
    Business Must be at the Forefront of the Recovery (Oct. 24, 2009)
    (online at www.whitehouse.gov/the-press-office/weekly-
    address-president-obama-says-small-business-must-be-forefront-
    recovery).
        \29\ See Section E, infra.
    ---------------------------------------------------------------------------
        Several related programs run by the Federal Deposit
    Insurance Corporation (FDIC) and the Federal Reserve will
    likewise be unaffected by the TARP's end. An FDIC program under
    which bank accounts are guaranteed up to $250,000, up from the
    earlier level of $100,000, is unrelated to the TARP and will
    remain in place until December 31, 2013. Similarly, certain
    financing that the Federal Reserve has made available in
    response to the financial crisis is unrelated to the TARP and
    will be unaffected by the TARP's termination.

    4. EESA Requirements Relating to Use of TARP Profits, or Approach to
            TARP Losses

        Most of the programs established in the TARP's early days
    carry the potential of a return on Treasury's investments,
    which gives rise to the question of what is the best use of any
    profits from the TARP. While EESA provides that all profits are
    to be used to pay down the national debt,\30\ there is an
    ongoing debate about what to do with TARP funds going forward.
    Should the TARP instead realize a net loss, EESA provides that
    ``the President shall submit a legislative proposal that
    recoups from the financial industry an amount equal to the
    shortfall in order to ensure that the Troubled Asset Relief
    Program does not add to the deficit or national debt.'' \31\
    ---------------------------------------------------------------------------
        \30\ 12 U.S.C. Sec. 5216(d).
        \31\ 12 U.S.C. Sec. 5239.
    ---------------------------------------------------------------------------
        The fact that the TARP morphed from the asset purchase
    program contemplated by the legislation to a capital infusion
    program complicated the issue somewhat, and later TARP programs
    such as HAMP, which are not intended to produce any return at
    all, complicated it further. It currently appears that,
    although some capital-injection programs will show a profit,
    the TARP as a whole will result in a loss.\32\ Even if the
    capital-injection programs show a profit, these profits will
    have to be large enough to also make up for outlays under
    programs such as HAMP, which are structured without any
    contemplation of a return of capital or interest. It is thus
    possible that legislation may result in financial institutions
    being charged for losses made on investments in two automobile
    companies and on foreclosure mitigation efforts. On the other
    hand, it may be argued that many of the financial institutions
    that received TARP funds would not have survived absent such
    capital injections, or, even if they themselves were not short
    of capital, would have been vulnerable had other giants in the
    industry fallen, and therefore asking for these institutions to
    contribute to an overall TARP shortfall is appropriate.
    Ultimately, EESA specifies that the determination of whether
    the program has made a loss is to be made after October 3,
    2013,\33\ and it may take several years for the results of some
    of the investments made under the TARP to be clear, although
    the TARP financial statements do calculate likely profit or
    loss for all TARP investments in fiscal year 2009.\34\
    ---------------------------------------------------------------------------
        \32\ Congressional Oversight Panel, Written Testimony of Treasury
    Secretary Timothy F. Geithner (Dec. 10, 2009) (online at
    cop.senate.gov/documents/testimony-121009-geithner.pdf) (hereinafter
    ``Sec. Geithner Written Testimony''); U.S. Department of the Treasury,
    Agency Financial Statement 2009, at 3 (Sept. 30, 2009) (online at
    www.treas.gov/press/releases/OSF%20AFR%2009.pdf) (hereinafter ``Agency
    Financial Statement 2009'').
        \33\ See 12 U.S.C. Sec. 5239.
        \34\ An amendment to a bill that passed the House on December 10,
    2009 (see Section G.1, infra) permits the FDIC to make an assessment
    for the Systemic Dissolution Fund used to repay any shortfalls in the
    Troubled Asset Relief Program to ensure that such shortfalls do not add
    to the deficit or national debt. Rep. Gary Peters, Amendment to the
    Wall Street Reform and Consumer Protection Act of 2009, Congressional
    Record, H14748-14750 (Dec. 11, 2009) (online at
    frwebgate.access.gpo.gov/cgi-bin/
    getpage.cgi?dbname=2009_record&page=H14745&position=all). One potential
    issue with this approach is that institutions that repaid their TARP
    funds in full would be required to make up the shortfall for those
    banks that were unable to do so. During a meeting with Panel staff on
    December 16, 2009, OFS Chief Counsel Timothy Massad said that OFS was
    aware of this issue but that it was too early to consider any concrete
    plans for such recoupment.
    ---------------------------------------------------------------------------

    5. Continuing Market Effects of the TARP: The Implicit Guarantee

        Even after the TARP has ended, it is likely that the effect
    of the TARP and related programs on the market will continue
    for some time. The decisions to rescue certain financial
    institutions have created an implicit government guarantee, the
    limits of which are unknown and the reasons for which are not
    fully articulated.\35\ This guarantee goes beyond the so-called
    too big to fail problem: it is not clear how far the guarantee
    extends into the smaller banks, and even some of the banks
    subjected to the ``stress tests''--which some commentators have
    viewed as the too big to fail list \36\--seem to pose no real
    threat to the financial system.\37\
    ---------------------------------------------------------------------------
        \35\ The ramifications of this may be visible in certain comments
    by rating agencies with regard to Citigroup. See Section D.5(b), infra.
        \36\ Thomas F. Cooley, The Need for Failure, Forbes.com (May 27,
    2009) (online at www.forbes.com/ 2009/05/26/fdic-treasury-banks-too-
    big-to-fail-opinions-columnists-sheila-bair.html).
        \37\ Metlife, which operates in a confined segment of the financial
    services industry, was also one of the nineteen entities selected for
    the stress tests. Federal Reserve Board of Governors, The Supervisory
    Capital Assessment Program: Overview of Results, at 30 (May 7, 2009)
    (online at www.federalreserve.gov/newsevents/press/bcreg/
    bcreg20090507a1.pdf).
    ---------------------------------------------------------------------------
        Implicit guarantees affect the market's view of these
    institutions, and a perception that an institution will be
    protected by the government may in fact result in the
    government's continued protection. Those institutions may
    factor the implicit guarantee into their calculation of
    downside risk, assuming the government will backstop any failed
    investments while they preserve any upside. Such risk
    calculations will have a ripple effect across the market as the
    investment portfolios of the guaranteed institutions' risk
    profiles shift. For example, the government guarantees that
    were provided to money market funds at the height of the
    financial crisis have now officially lapsed, but at least one
    commentator has noted that the implicit guarantees may linger,
    and may be influencing both the funds' investment decisions and
    their cost of capital.\38\ As discussed in the Panel's November
    report, capital tends to be cheaper for institutions that have
    strong guarantees, such as a guarantee backed by the U.S.
    government.\39\ This has the dual effect of decreasing the cost
    of capital for the guaranteed institution and placing that
    institution at a competitive advantage over institutions
    without such a guarantee. These guarantees have lowered the
    cost of capital for many institutions.\40\ Investors make
    similar calculations, taking on more risk when they are
    protected from the consequences of their decisions.\41\ If
    there is no new crisis and bailout, the market-distorting
    effect of the TARP and related programs may dissipate as
    institutions and investors come to believe that the government
    will not step in to save failing institutions, or at least have
    no government bailout in their recent memories. The effect in
    the period immediately following the TARP's dissolution,
    however, must be taken into account when analyzing market
    behavior, especially with regard to risk calculations.
    ---------------------------------------------------------------------------
        \38\ Daisy Maxey, Money Funds Again Take On Risk, Wall Street
    Journal (Nov. 16, 2009) (online at online.wsj.com/article/
    SB10001424052748703811604574534011795078126.html).
        \39\ COP November Oversight Report, supra note 2, at 37.
        \40\ COP November Oversight Report, supra note 2, at 37 (``The
    research firm SNL Financial (SNL) . . . found that the DGP saved
    issuers 39 percent in interest costs'').
        \41\ Moral hazard arises when the government agrees to guarantee
    the assets and obligations of private parties and protect them from
    loss. The insured party might take greater risk, especially when the
    protected party is not required to purchase the protection. This
    ``free'' insurance causes a number of distortions in the marketplace.
    On the financial institution side, it might promote risky behavior. On
    the investor and shareholder side, it will provide less incentive to
    hold management to a high standard with regard to risk-taking.
        For an in depth discussion of moral hazard in the context of TARP
    programs, see the Panel's November report. COP November Oversight
    Report, supra note 2, at 70-72.
    ---------------------------------------------------------------------------
        The implicit guarantee that has now been created will not
    end with the end of the TARP. The markets will assume that the
    government will intervene with a new TARP in the event of
    another crisis, unless the government credibly establishes that
    this will not happen. One of the first orders of business for
    the government as part of the unwinding of the TARP must be to
    clarify or rein in the implicit guarantee and the distortion it
    has on the markets.\42\
    ---------------------------------------------------------------------------
        \42\ This process may have already begun with the failure of CIT in
    July 2009. Although the company received $2 billion in CPP funds, the
    federal government did not provide additional funding when it became
    clear that the company would not survive despite the capital injection.
    CIT Group, Inc., CIT Announces That Discussions with Government
    Agencies Have Ceased (July 15, 2009) (online at www.businesswire.com/
    portal/site/cit/
    ?ndmViewId=news_view&newsId=20090715006374&newsLang=en). CIT's
    prepackaged bankruptcy plan was confirmed by a court in December. CIT
    Group, Inc., CIT Prepackaged Plan of Reorganization Confirmed by Court
    (Dec. 8, 2009).
    ---------------------------------------------------------------------------
        The term too big to fail has come to be used as shorthand
    for the implicit guarantee and to describe institutions that
    the government dare not let fail, because such failure would
    threaten to spread to the larger economy.\43\ Such risk might
    be posed by reason of size or by the impact a company's failure
    would have on the financial system. Size alone does not
    determine this status, although the size of some institutions
    means that their collapse in markets that have not properly
    addressed the risk could have a significant impact on the
    economy. Financial institutions can also threaten the financial
    system by reason of their concentration of derivative risk or
    by the fact that they provide essential services, disruption of
    which could result in significant dislocations in the financial
    system. The securities processing services, custody, and cash
    management and treasury functions of some institutions are
    depended upon by so many large entities that their loss could
    cause significant problems in the global financial system. Risk
    is multi-faceted, and because risk derives from the very
    different functions and activities of the various financial
    institutions, it will be very difficult to find a one-size-
    fits-all definition of too big to fail.
    ---------------------------------------------------------------------------
        \43\ In this context, it is worth noting that ``risk'' is not the
    only multi-faceted concept. The too big to fail shorthand implies that
    there is only one kind of failure: where the dissolution of the
    relevant entity could create enormous labor or market disruptions. This
    arguably presents the choice facing Treasury and the U.S. government as
    always between chaos or moral hazard: to use concrete examples, that
    the only choices were either to let an entity--for example, Lehman
    Bros.--collapse into chaos, and bring other entities with it, or to
    provide the entity--for example, AIG--with bail-outs, distorting the
    markets. Under other circumstances, however, these extreme poles might
    not have formed the models for government intervention. Put another
    way, that these were the choices Treasury made in 2008-2009 does not
    mean that they were the only choices available to it. This report,
    however, deals with the problem of exit, and therefore does not address
    alternative actions that Treasury, the Bush or Obama Administrations,
    or Congress could have taken in the crisis. The TARP program may not
    have been the only means of responding to the crisis, but in discussing
    exit from the TARP program, this report can only assess exit from the
    choices that were actually made.
    ---------------------------------------------------------------------------
        In Section G of this report, the Panel reviews some of the
    options that are currently being proposed to address the risks
    posed by too big to fail institutions. The Panel takes no view
    on those options, but notes that it is essential that the
    unwinding of the TARP includes steps to address the moral
    hazard and market distortion that the TARP and related programs
    created.

    6. Certain Tax Issues Affecting TARP Exit

        TARP exit strategy and the operation of the CPP are
    affected by a series of Treasury Department decisions that
    limit the applicability of the Internal Revenue Code (Code)
    rules limiting the use of a corporation's net operating losses
    (NOLs).\44\ NOLs can reduce the future income and hence the tax
    liability of a financial institution, or of any other
    corporation.\45\ Equally important, a bank holding company's
    tier 1 regulatory capital will ordinarily include a portion of
    its NOLs.\46\ Any cap on an institution's available NOLs could
    be expected to have a negative effect on the institution's
    value and regulatory capital position. If the institution has a
    large number of NOLs, the effect is likely to be substantial.
    ---------------------------------------------------------------------------
        \44\ An NOL, conceptually, is the excess of a corporation's
    deductions over its taxable income. Section 382 also applies to what
    are called ``built-in losses'' (in simplest terms, the amount by which
    the value of an asset is less than its cost), and its companion section
    383 applies in a similar way to the carryforward of unused tax credits.
    NOLs, built-in losses, and tax credits together form a corporation's
    ``deferred tax assets,'' whose value is greater than the value of the
    corporation's NOLs alone. Although not technically correct, the term
    ``NOL'' is used here for ease of presentation to refer to all three tax
    attributes.
        \45\ A corporation is generally permitted to carry forward NOLs for
    20 years, to offset its future income.
        \46\ 12 CFR Sec. 225 at appendix A.II.A.1. To summarize the rule,
    NOLs may constitute up to 10 percent of tier 1 capital, to the extent
    that the institution ``is expected to realize [a tax deduction by their
    use] within one year . . . based on its projections of future taxable
    income for that year . . . .'' 12 CFR Sec. 225 at appendix
    A.II.B.4.a.i.
    ---------------------------------------------------------------------------
        The NOL limitation rules, contained in section 382 of the
    Code, limit the annual availability of a corporation's NOLs
    after a ``change in control'' of that corporation to a small
    percentage of the otherwise usable amount.\47\ The corporation
    does not have to be sold to trigger the limitation; a change in
    control occurs if the percentage of the corporation's stock
    owned by any of its ``five percent shareholders'' increases by
    more than 50 percent over a three-year period, whether by the
    corporation's sale or otherwise. A ``five percent shareholder''
    is any shareholder that owns five percent or more of the stock
    of the corporation. The stock owned by all shareholders who are
    not five percent shareholders is treated as being owned by one
    or more groups which may be treated as five percent
    shareholders, referred to as the ``public groups.''
    ---------------------------------------------------------------------------
        \47\ 26 U.S.C. Sec. 382. The limitation may be severe. If a change
    in control occurs, the amount of income that the ``post-change''
    corporation can offset by ``pre-change'' losses is capped at a small
    percentage of the corporation's value, which is roughly equal to its
    market capitalization. This percentage, called ``the long-term tax-
    exempt rate'' and set monthly by the IRS, is currently at 4.14 percent.
    Thus, at present, a corporation whose market capitalization was $1
    billion could use the NOLs generated before its change in control only
    to the extent of $41.4 million of taxable income each year.
    ---------------------------------------------------------------------------
        The Internal Revenue Service (IRS) issued several notices
    (the EESA Notices) containing guidance about the application of
    section 382 to institutions engaged in transactions with the
    Treasury Department under EESA. The Notices extended to
    transactions under any of the TARP programs. The first three
    EESA Notices, issued in October 2008, January 2009, and April
    2009, allowed Treasury to take, and the institutions to redeem
    eventually, stock and warrants without causing a change in
    ownership under section 382.\48\ Any other result would have
    increased substantially the uncertainty created by TARP and the
    potential cost of participation in its programs. The tax and
    regulatory capital costs of participation by financial
    institutions might well have greatly limited TARP's
    effectiveness. All of the EESA Notices to date have been issued
    under both the Secretary's authority to issue income tax
    regulations and to issue ``such regulations and other guidance
    as may be necessary or appropriate to define terms or carry out
    the authorities or purposes of [EESA].'' \49\
    ---------------------------------------------------------------------------
        \48\ IRS Notice 2008-100 (Oct. 15, 2008) (online at www.irs.gov/
    irb/2008-44_IRB/ar13.html); IRS Notice 2009-14 (Jan. 31, 2009) (online
    at www.irs.gov/pub/irs-drop/n-09-14.pdf); IRS Notice 2009-38 (April 13,
    2009) (online at www.irs.gov/irb/2009-18_IRB/ar09.html). Each of the
    Notices was described as ``amplifying'' and was designated as
    ``superseding'' the immediately prior Notice. The first Notice applied
    only to preferred shares and warrants issued under the CPP. The second
    expanded the treatment to include the TIP, SSFI, and the AIFP. It also
    added a provision excepting from section 382 Treasury's ownership of
    stock ``other than preferred stock.'' The April Notice extended the
    guidance to the CAP and AGP, and in anticipation of Treasury's exchange
    of preferred stock for common stock of Citigroup, exempted Treasury's
    receipt of that stock from section 382, even though such stock was not
    received directly under the TARP program. The Revenue Service had
    previously issued similar guidance for two pre-EESA transactions that
    were part of the financial stability effort.
        \49\ 12 U.S.C. Sec. 5211(c)(5). In addition to the Secretary's
    overall authority to issue income tax regulations, section 382(m)
    specifically authorizes the Secretary to issue ``such regulations as
    may be necessary or appropriate to carry out the purposes of this
    section.'' 26 U.S.C. Sec. 382(m).
    ---------------------------------------------------------------------------
        In addition, the IRS issued a Notice at the end of
    September 2008, prior to the enactment of EESA, stating that
    important elements of section 382 would not apply to a change
    in ownership of a bank.\50\ Any bank was allowed to rely on the
    Notice, but it was identified as having been issued to
    facilitate the acquisition of Wachovia by Wells Fargo and at
    least one other bank acquisition.\51\ That Notice was rescinded
    by Congress, however, as part of the economic stimulus
    legislation, for any ownership change after January 16,
    2009.\52\ The effective date excluded transactions under
    contracts entered into on or before January 16, so that the
    Notice did apply to lift the section 382 limitations for the
    acquisition of Wachovia. The accompanying Conference Committee
    Report mentioned without comment the EESA Notices that existed
    at the time of the report.\53\
    ---------------------------------------------------------------------------
        \50\ IRS Notice 2008-83 (Sept. 30, 2008) (online at www.irs.gov/
    irb/2008-42_IRB/ar08.html). The items involved were ``any deduction . .
    . for losses on loans or bad debts (including any deduction for a
    reasonable addition to a reserve for bad debts).''
        \51\ See Crowell & Moring, Tax Notice Drives Wachovia Takeover
    Turmoil (Oct. 6, 2008) (online at www.crowell.com/NewsEvents/
    Newsletter.aspx?id=1032); Baker Hostetler, IRS Net Operating Loss
    Guidance to Banks (Oct. 9, 2009) (online at www.bakerlaw.com/irs-net-
    operating-loss-
    guidance-to-banks-10-9-2008/); Press Release, Grassley Seeks Inspector
    General Review of Treasury Bank Merger Move (Nov. 14, 2008) (online at
    finance.senate.gov/press/Gpress/2008/prg111408c.pdf) (``The Notice,
    issued just days before Congress voted on the Emergency Economic
    Stabilization Act of 2008, appears to have had the effect of benefiting
    Wachovia Corporation executives and Wells Fargo . . . Treasury's
    issuance of the Notice apparently enabled Wells Fargo to take over
    Wachovia despite a pending bid from Citibank. Without the issuance of
    the Notice, Wells Fargo would have only been able to shelter a limited
    amount of income. Under the Notice, however, Wells Fargo could
    reportedly shelter up to $74 billion in profits''). See also Sen.
    Charles E. Schumer, Schumer Seeks Answers from IRS, Treasury on Tax
    Code Change That Subsidizes Bank Acquisitions (Oct. 30, 2008) (online
    at schumer.senate.gov/new_website/record.cfm?id=304737) (``Wells Fargo
    . . . stands to save $19.4 billion as a result of the tax change, PNC
    Financial is estimated to save more than $5.1 billion in its takeover
    of Cleveland-based National City'').
        \52\ Congress found that:
        (1) The delegation of authority to the Secretary of the Treasury
    under section 382(m) of the Internal Revenue Code of 1986 does not
    authorize the Secretary to provide exemptions or special rules that are
    restricted to particular industries or classes of taxpayers.
        (2) Internal Revenue Service Notice 2008-83 is inconsistent with
    the congressional intent in enacting such section 382(m).
        (3) The legal authority to prescribe Internal Revenue Service
    Notice 2008-83 is doubtful.
        American Recovery and Reinvestment Act (ARRA), Pub. L. No. 111-5,
    at Sec. 1261 (2009).
        \53\ Conference Report to Accompany H.R. 1, at 555-560, 111th Cong.
    (2009) (H.R. Rept. 111-16) (online at legislative.nasa.gov/
    ConferenceReport%20111-16.pdf).
    ---------------------------------------------------------------------------
        The fourth EESA Notice was issued in December 2009.\54\ The
    December Notice expands the prior guidance by stating that a
    sale by the Treasury Department of stock it had received under
    any of the EESA programs to a ``public group,'' that is, to a
    group of less than five percent shareholders, would not trigger
    an ownership change. The December Notice applies to all
    Treasury shareholdings. Its most immediate application and
    likely most significant application, however, is to the planned
    sale of the shares of Citigroup that Treasury holds.\55\
    ---------------------------------------------------------------------------
        \54\ IRS Notice 2010-2 (Dec. 11, 2009) (online at www.irs.gov/pub/
    irs-drop/n-10-02.pdf).
        \55\ This section does not discuss the possible impact of the
    December Notice on future sales of stock held by Treasury under the
    Automotive Industry Financing Program, SSFI, or any common stock
    acquired by Treasury pursuant to its CPP warrants. However, as noted in
    the text, the December notice is likely to have its greatest
    significance as applied to Citigroup because any triggering of section
    382 will likely reduce a financial institution's tier 1 capital. in the
    value of Citigroup's NOLs and in the amount of its tier 1 capital.
    ---------------------------------------------------------------------------
        The application of the section 382 limitations to Citigroup
    would have been harsh.\56\
    ---------------------------------------------------------------------------
        \56\ Citigroup recognized the risk of the application of section
    382. In early June 2009, as part of its Exchange Offer with Treasury,
    and as described in its 2009 Third Quarter 10-Q, its Board had adopted
    a ``tax benefits preservation plan . . . to minimize the likelihood of
    an ownership change [under section 382] and thus protect Citigroup's
    ability to utilize certain of its deferred tax assets, such as net
    operating loss and tax credit carry forwards, to offset future
    income.'' However, the 10-Q continued: ``[d]espite adoption of the
    [p]lan, future stock issuance our transactions in our stock that may
    not be in our control, including sales by the USG, may . . . limit the
    Company's ability to utilize its deferred tax asset and reduce its
    [tangible common equity] and stockholders equity.'' Citigroup,
    Quarterly Report for the Third Quarter of 2009 (10-Q), at 11 (online at
    www.citibank.com/citi/fin/data/q0903c.pdf?ieNocache=106) (hereinafter
    ``Citigroup Third Quarter 10-Q'').
    ---------------------------------------------------------------------------
        Citigroup reported deferred tax assets (DTA) of $38 billion
    as of September 30, 2009, and stated that it would require
    ``approximately $85 billion of taxable income during the
    respective carry-forward periods to fully realize its U.S.
    federal, state and local DTA.'' \57\ Given Citigroup's current
    market capitalization of $80.02 billion, it could use its NOLs
    only to offset $3.31 billion in taxable income annually, under
    the section 382 limitation.\58\
    ---------------------------------------------------------------------------
        \57\ It is not possible, or very difficult, to discern from public
    information how much taxable income Citigroup would need in order to
    use its DTAs if it were subject to section 382 limitations. Use of DTAs
    is not one to one against taxable income.
        \58\ $3.23 billion is Citigroup's market capitalization multiplied
    by the long-term tax exempt rate. See supra note 47.
    ---------------------------------------------------------------------------
        Of course, any application of the limitation would have
    also reduced Citigroup's capital. Citigroup reported that as of
    September 30, 2009 ``[a]pproximately $13 billion of [its] net
    deferred tax asset is included in Tier 1 and Tier 1 Common
    regulatory capital.'' \59\ Citigroup reported that its tier 1
    common and tier 1 regulatory capital were approximately $90
    billion, and $126 billion respectively. It is difficult to
    calculate the capital reduction that imposition of the 382
    limitations would cause, but the reduction would likely be a
    significant percentage of the $13 billion, and Citigroup would
    have been required to raise capital from other sources to
    restore its capital position.\60\ Under the worst set of
    circumstances, such a reduction in tier 1 capital might have
    left Citigroup undercapitalized and postponed its eligibility
    for exit from the TARP altogether.
    ---------------------------------------------------------------------------
        \59\ Citigroup Third Quarter 10-Q, supra note 56, at 11.
        \60\ Without an ability to know the amount of the $13 billion
    figure made up of federal NOLs, a precise calculation is impossible.
    ---------------------------------------------------------------------------
        By eliminating the section 382 limitations, the Treasury
    Department avoided either reducing the value of its shares (and
    the capital held by Citigroup) or being forced to sell its
    shares serially over a period of years, in amounts small enough
    not to increase the holdings of Citigroup's public stockholders
    by more than five percent.
        Nonetheless, the December Notice has attracted criticism as
    an additional subsidy to Citigroup and a loss to the
    taxpayers.\61\ Section 382 is a highly reticulated statute, and
    this departure from its operation, under the authority both of
    the Code and EESA, has raised concerns.\62\
    ---------------------------------------------------------------------------
        \61\ House Committee on Oversight and Government Reform,
    Subcommittee on Domestic Policy, Opening Statement of Committee
    Chairman Dennis Kucinich, The U.S. Government as Dominant Shareholder:
    How Should Taxpayers' Ownership Rights be Exercised? (Part II), at 3
    (Dec. 17, 2009) (online at oversight.house.gov/images/stories/
    121709_111th_DP_Opening_Statement_Chairman_Kucinich_121709.pdf); Sen.
    Charles Grassley, Grassley Urges Fair Tax Treatment for Small
    Businesses Compared to Large Banks (Dec. 23, 2009) (online at
    grassley.senate.gov/news/Article.cfm?customel_ dataPageID_1502=24632).
    Senator Jim Bunning has introduced a bill to rescind 2010-2, and to
    require Treasury to receive congressional authorization for any future
    regulations under section 382 that provide an ``exemption or special
    rule . . . which is restricted to dispositions of instruments acquired
    by the Secretary.'' S. 2916, 111th Cong. (Dec. 18, 2009).
        \62\ Binyamin Appelbaum, U.S. gave up billions in tax money in deal
    for Citigroup's bailout repayment, Washington Post (Dec. 16, 2009)
    (online at www.washingtonpost.com/wp-dyn/content/article/2009/12/15/
    AR2009121504534.html) (quoting Robert Willens, a tax accounting expert,
    that ``I've been doing taxes for almost 40 years, and I've never seen
    anything like this, where the IRS and Treasury acted unilaterally on so
    many fronts'').
    ---------------------------------------------------------------------------
        Congress' rescission of the September 2008 Notice directed
    at the Wells Fargo-Wachovia transaction is inconclusive.\63\
    The legislation indicated a congressional belief that section
    382 was not intended to apply differently to ``particular
    industries.'' \64\ However, the Notice was arguably directed at
    private transactions and was announced before the enactment of
    EESA.\65\ In addition, by the time Congress acted to reverse
    that Notice, the CPP, TIP, and SSFI were in operation, and the
    significance of the EESA Notices was apparent. The first two
    EESA Notices are cited in the ARRA Conference Committee Report
    without comment, positive or negative, and Congress has taken
    no action, either in ARRA or thereafter to rescind the EESA
    Notices.
    ---------------------------------------------------------------------------
        \63\ IRS Notice 2008-83 (Sept. 30, 2008) (online at www.irs.gov/
    irb/2008-42_IRB/ar08.html).
        \64\ See ARRA, supra note 52.
        \65\ Although EESA was close to enactment at the end of September,
    the consensus was that the TARP would be used to purchase ``troubled
    assets'' from financial institutions. Congressional Oversight Panel,
    August Oversight Report: The Continued Risk of Troubled Assets (Aug.
    11, 2009) (online at cop.senate.gov/documents/cop-081109-report.pdf)
    (hereinafter ``COP August Oversight Report'').
    ---------------------------------------------------------------------------
        Given the previous guidance, it is difficult to understand
    why Treasury waited until December 2009 to extend the earlier
    guidance to a sale of its shares to the public.\66\ Treasury
    staff has indicated that, before the decision was made to sell
    the shares to the public, it was possible that Citigroup would
    repurchase the shares itself, making the December Notice
    unnecessary; the Notice would, however, have been necessary in
    any event with respect to the other institutions in which
    Treasury continues to hold a common stock interest.\67\ It is
    also possible that Treasury did not want to run a risk of
    attracting a negative congressional reaction such as that which
    led to the reversal of Notice 2008-83.
    ---------------------------------------------------------------------------
        \66\ Some tax experts believe that the conclusion was implicit in
    the prior assurance that section 382 could not apply to any repurchase
    of CPP shares from Treasury. Amy Elliot, Criticism of Notice Allowing
    Citigroup to Keep NOLs is Unfounded, Official Says, Tax Analysts (Dec.
    17, 2009) (``Most thought that `even if it wasn't a redemption that
    shouldn't matter,''' said Todd B. Reinstein, a partner with Pepper
    Hamilton LLP. ``If it was a sale to a public group it should be the
    same treatment. This just . . . confirms that'').
        \67\ Treasury conversations with Panel staff (Jan. 7, 2009).
    ---------------------------------------------------------------------------
        Treasury has pointed out to staff of the Panel that the
    December Notice balances the policies of section 382 and EESA
    by limiting the EESA relief to sales to the public and not to
    any freestanding five percent shareholders. This avoids the
    primary thrust of section 382 by not creating any single
    shareholder or shareholders with more than five percent of
    Citigroup stock through its sale. The limitation is
    significant, but its relevance in this case depends to some
    degree on the relationship between the timing of the Notice and
    Treasury's decision to sell its Citigroup shares to the public.
        Assistant Secretary of the Treasury for Financial Stability
    Herb Allison's initial response to the criticism of the
    December Notice, in a letter to The Washington Post, emphasized
    that Treasury could not avoid taxes because it did not pay
    taxes.\68\ The response sidesteps the fact that section 382
    applies to Citigroup, not Treasury, and that the operation of
    the statute is not limited to sales of a company. A second
    argument, that Citigroup should not ``be treated differently
    simply because the government intervened'' comes closer to the
    core of the matter. The December Notice eliminated what could
    have been a major obstacle to the severance of Treasury's
    ownership of Citigroup common stock. Without the Notice,
    Treasury could still have eliminated the costs of the section
    382 limitations for Citigroup by selling its shares into the
    market over a number of years, causing no revenue loss.
    Calculations of the extent to which taxpayers benefited or not
    from the lifting of the section 382 limitation are extremely
    difficult in any event, because they depend on assumptions
    about Citigroup's income in future years if use of its NOLs had
    been limited, and the value to the taxpayers of realizing an
    immediate gain from the sale of the Citigroup shares.
    ---------------------------------------------------------------------------
        \68\ Assistant Secretary Herbert Allison, Letter to the Editor,
    U.S. Isn't Evading Taxes on Citigroup, Washington Post (Dec. 22, 2009)
    (online at www.washingtonpost.com/wp-dyn/content/article/2009/12/22/
    AR2009122200040.html).
    ---------------------------------------------------------------------------
        Finally, the EESA Notices, however sound in themselves,
    illustrate again the inherent conflict implicit in Treasury's
    administration of the TARP. In this case the conflict is a
    three-way one, pitting Treasury's responsibilities as TARP
    administrator, regulator, and tax administrator against one
    another. Perhaps the most troublesome aspect of the debate over
    the December Notice is posed by this conflict, in the
    perception that income tax flexibility is especially, and
    quickly, available for large financial institutions at a time
    of general economic difficulty.

                 C. Historical Precedents: the RFC and the RTC

        The TARP is not the first U.S. government program to
    involve large-scale U.S. government acquisition of private
    assets.\69\ The Reconstruction Finance Corporation (RFC) and
    the Resolution Trust Corporation (RTC) provide prior models for
    the investment of public funds in struggling or insolvent
    private entities and the ensuing public sector management and
    disposition of the acquired assets. The RFC was established in
    1932 and ultimately unwound in 1957,\70\ while the RTC was
    established in 1989 and ultimately terminated in 1995.\71\
    ---------------------------------------------------------------------------
        \69\ See generally Congressional Oversight Panel, April Oversight
    Report: Assessing Treasury's Strategy: Six Months of TARP, at 35-50
    (Apr. 7, 2009) (online at cop.senate.gov/documents/cop-040709-
    report.pdf) (hereinafter ``COP April Oversight Report'').
        \70\ Congress terminated the lending power of the RFC in 1953, and
    its remaining duties were transferred to other agencies in 1957. See
    The National Archives, Records of the Reconstruction Finance
    Corporation, at 234.1 (online at www.archives.gov/research/guide-fed-
    records/groups/234.html) (accessed Jan. 13, 2010) (hereinafter
    ``Records of the RFC'').
        \71\ See Timothy Curry and Lynn Shibut, The Cost of the Savings and
    Loan Crisis: Truth and Consequences, FDIC Banking Review, at 28 (Dec.
    2000) (online at www.fdic.gov/bank/analytical/banking/2000dec/
    brv13n2_2.pdf) (hereinafter ``The Cost of the Savings and Loan Crisis:
    Truth and Consequences'').
    ---------------------------------------------------------------------------

    1. The RFC

        President Herbert Hoover established the RFC in response to
    the credit freeze of the Great Depression.\72\ The RFC provided
    liquidity to struggling institutions through investments in
    preferred stock and debt securities.\73\ Initially, the RFC
    provided liquidity for healthier institutions but was prevented
    from offering long-term capital to weaker institutions by
    restrictions such as high interest rates, collateral
    requirements, and short-term lending requirements.\74\ The
    Emergency Banking Act of 1933, however, gave the RFC the
    ability to offer investment capital, while looser collateral
    requirements expanded the RFC's lending capacity.\75\
    Ultimately, under President Franklin Roosevelt, successive
    expansions of authority helped the RFC evolve from its initial
    role as a short-term lender into an agency that provided
    federal support for the credit markets and became a major part
    of the New Deal program.\76\
    ---------------------------------------------------------------------------
        \72\ James S. Olson, Saving Capitalism: The Reconstruction Finance
    Corporation and the New Deal, 1933-1940, at 14-15 (1988) (hereinafter
    ``Olson'').
        \73\ See Olson, supra note 72. The funds were provided to banks,
    railroads, financial institutions, commercial enterprises, industrial
    banks, farm collectives and a variety of other entities, as well as to
    other agencies. See id. at 43-44. See generally Records of the RFC,
    supra note 70.
        \74\ See Jesse Jones, 50 Billion Dollars: My Thirteen Years with
    the RFC (1932-1945), at 19, 520 (1951) (hereinafter ``Jones''); see
    also Olson, supra note 72, at 69.
        \75\ See Olson, supra note 72, at 69.
        \76\ See Olson, supra note 72, at 83, 88; see also Jones, supra
    note 74. In addition to financial sector entities, the many recipients
    of RFC loans included department stores, fabric and paper mills, and
    small business owners as well as banks and railroads. See id. at 184-
    85, 188, 190. Jack Dempsey also received a loan, which he used to
    refurbish a restaurant. See id. at 190.
    ---------------------------------------------------------------------------
        The RFC investments in bank and industry capital took place
    in the shadow of the Emergency Banking Act and President
    Franklin Roosevelt's nation-wide bank holiday. After the
    holiday, only those banks that were liquid enough to do
    business were permitted to reopen. Banks with insufficient
    assets to return to depositors and creditors were reorganized
    with RFC assistance or liquidated.\77\ The key steps the RFC
    followed in resolving failing banks have been cited as a model
    method for dealing with bank failures: (1) Write down a bank's
    bad assets to realistic economic values; (2) evaluate bank
    management and make any needed and appropriate changes; (3)
    inject equity in the form of preferred stock but only after the
    write-downs; and (4) receive the dividends and eventually
    recover the par value of the stock as the bank returns to
    profitability and full private ownership.\78\
    ---------------------------------------------------------------------------
        \77\ See Jones, supra note 74.
        \78\ Federal Reserve Bank of Kansas City, Speech by President
    Thomas Hoenig: Too Big Has Failed, at 7 (Mar. 6, 2009) (online at
    www.kc.frb.org/speechbio/hoenigPDF/Omaha.03.06.09.pdf).
    ---------------------------------------------------------------------------
        The RFC's involvement with the entities to which it
    provided funds was neither hands-off nor consistently
    interventionist. Although the RFC was the largest investor in
    the country, its head, Jesse Jones, expressed a preference for
    leaving competent executives in charge of their institutions,
    and preferred to offer advice and capital without trying to
    control or manage the institutions.\79\ He stated generally
    that where he felt a bank was well run, the RFC would not
    become involved with management.\80\ This general philosophical
    approach, however, did not prevent Jones from intervening where
    he thought it necessary and suggesting management and board
    changes for RFC debtors.\81\ In some cases, the RFC loan was
    contingent upon the relevant entity accepting new management
    chosen by the RFC.\82\ Jones also certified the appropriateness
    of the salaries received by executives at corporations
    accepting RFC loans and instituted a declining scale of salary
    reductions, under which cuts could exceed 50 percent.\83\ On
    the other hand, Jones did not use the RFC to make economic and
    industrial policy decisions.\84\ Jones stated that he resisted
    what he considered the New Dealers' plans to use the RFC funds
    as a ``grab bag'' \85\ and instead ran the RFC according to
    business principles, using what he considered ``proper
    accounting methods'' to manage the RFC's investments.\86\ In
    his memoirs, Jones stated that everyone assumed that the RFC
    was to provide the emergency relief necessary for weathering
    the crisis. When private enterprise was in a position to
    invest, he expected the RFC to cease operations.\87\ By the end
    of 1935, the RFC had loaned or invested $10.6 billion ($167.38
    billion in 2009 dollars) \88\ in various businesses and
    government agencies, often (although not always) without
    interfering in the operations of the debtors.\89\ Most of the
    RFC's investments in banks were ultimately recovered in full,
    and the RFC also received dividends from those investments,
    although its investments in railroads were less lucrative.\90\
    ---------------------------------------------------------------------------
        \79\ See Jones, supra note 74, at 125-127.
        \80\ See Jones, supra note 74, at 125-127.
        \81\ See Charles Calomiris and Joseph Mason, How to Restructure
    Failed Banking Systems: Lessons from the U.S. in the 1930s and Japan in
    the 1990s, National Bureau of Economic Research, at 20-24 (Apr. 2003)
    (online at papers.nber.org/papers/w9624.pdf?new_window=1).
        \82\ The most famous instances of t his kind of RFC control were
    Continental Illinois Bank and Trust Company and the Union Trust Company
    of Cleveland. See Olson, supra note 72, at 125; Joseph R. Mason,
    Reconstruction Finance Corporation Assistance to Financial
    Intermediaries and Commercial & Industrial Enterprise in the U.S.,
    1932-1937, at 20-21 (Jan. 17, 2000).
        \83\ See Olson, supra note 72, at 125-126.
        \84\ See Olson, supra note 74, at 127.
        \85\ See Jones, supra note 74, at 290.
        \86\ Congressional Oversight Panel, Written Testimony of Alex
    Pollock Taking Stock: Independent Views on TARP's Effectiveness, at 3
    (Nov. 19, 2009)(online at cop.senate.gov/documents/testimony-111909-
    pollock.pdf) (hereinafter ``Pollock COP Testimony''). From its
    formation in 1932 onwards, the RFC and its subsidiaries prepared
    monthly financial statements setting forth cumulative assets,
    liabilities, and shareholder capital. Where applicable, these
    ``Statement[s] of Condition'' also listed the cumulative loan positions
    with recipient firms, including data such as authorized loan amount,
    proceeds disbursed/not disbursed, and repayments. These loan statements
    included detailed footnotes. See generally Reconstruction Finance
    Corporation, Statement of Condition (Dec. 31, 1934). In time, the RFC
    also added a ``Statement of Income and Expense,'' that more explicitly
    detailed income, expenses, and profits (losses). See Reconstruction
    Finance Corporation, Statement of Condition (Dec. 31, 1937). By the
    1930s, most publicly traded corporations produced some financial
    information for their investors. Principally, this meant two documents:
    the balance sheet and the income statement. The balance sheet was
    broadly divided into two section: ``assets'' and ``liabilities'' (or
    ``liabilities and capital''). Income statements varied more widely, but
    almost always had a description of revenues and expenses, and some
    statement of profit and loss. See generally Mortimer Battey Daniels,
    Corporation Financial Statements, at 5-7 (first edition 1934, reprinted
    1980). Thus, the RFC financial statements mirrored those of its non-
    government peers.
        The financial statements prepared by OFS with rsepect to the TARP
    program, and the accompanying MD&A, provide extensive discussion of the
    results of all the TARP programs. The notes to the statements are not
    easily accessible for a lay leader, but the MD&A is easier to read and
    includes a short executive summary. Overall, Agency Financial Report
    seems broadly consistent with the RFC precedent. Agency Financial
    Statement 2009, supra note 32; see Section D.3, infra.
        \87\ See Jones, supra note 74, at 191. The RFC also declined to
    provide loans to industries that had access to private capital. See id.
        \88\ A consumer price index inflation calculator is available via
    the Bureau of Labor Statistics (online at data.bls.gov/cgi-bin/
    cpicalc.pl).
        \89\ See Jones, supra note 74, at 127.
        \90\ See Pollock COP Testimony, supra note 86, at 2-3.
    ---------------------------------------------------------------------------

    2. The RTC

        The RTC was established as part of the effort to address
    the savings and loan crisis of the 1980s.\91\  Scholars have
    cited volatile interest rates, state and federal deregulation,
    market shifts and adverse economic conditions as factors
    contributing to the crisis.\92\ By the end of 1986, 441 thrifts
    representing $113 billion were insolvent, and 533 thrifts
    representing $453 billion held severely impaired assets.\93\
    Together, those insolvent and struggling thrifts held nearly 50
    percent of the assets in the industry.\94\
    ---------------------------------------------------------------------------
        \91\ See Lee Davison, Politics and Policy: The Creation of the
    Resolution Trust Corporation, FDIC Banking Review, at 17-18 (July 2005)
    (online at www.fdic.gov/bank/analytical/banking/2005jul/article2.pdf)
    (hereinafter ``Politics and Policy: The Creation of the Resolution
    Trust Corporation'').
        \92\ See The Cost of the Savings and Loan Crisis: Truth and
    Consequences, supra note 71, at 27 (describing the factors contributing
    to the crisis and citing sources).
        \93\ See id.
        \94\ See id.
    ---------------------------------------------------------------------------
        In response to the crisis, the Financial Institutions
    Reform, Recovery and Enforcement Act of 1989 (FIRREA) created
    the RTC as a limited-term entity. (Although originally intended
    to operate for five years, it was extended twice, ultimately
    until 1995.) \95\ It acted as conservator or receiver of
    eligible insolvent institutions, and was responsible for
    carrying assets of the insolvent institutions until it could
    sell them.\96\ Its funding derived in part from the Resolution
    Funding Corporation, which was partially supported by the
    Federal Home Loan Banks and the Treasury and issued long-term
    bonds to the public.\97\ Among other methods, the RTC created
    joint ventures with private parties to help dispose of thrift
    assets. The private sector partner purchased, managed and sold
    the assets, and shared returns with the RTC.\98\ The RTC
    created 72 such joint ventures between 1992 and 1995, which
    collectively held assets with a book value of $21.4
    billion.\99\
    ---------------------------------------------------------------------------
        \95\ See Politics and Policy: The Creation of the Resolution Trust
    Corporation, supra note 91, at 19; see also The Cost of the Savings and
    Loan Crisis: Truth and Consequences, supra note 71, at 28.
        \96\ See The Cost of the Savings and Loan Crisis: Truth and
    Consequences, supra note 71, at 28-30.
        \97\ See id.
        \98\ Federal Deposit Insurance Corporation, Managing the Crisis:
    The FDIC and RTC Experience, Chronological Overview: Chapter 15 (Jan.
    5, 2005) (online at www.fdic.gov/bank/historical/managing/Chron/1992/
    index.html) (hereinafter ``Managing the Crisis: The FDIC and RTC
    Experience'').
        \99\ See Ralph F. MacDonald III, Mark V. Minton, Sarah H. Eberhard,
    Brett P. Barragate, Glenn S. Arden, James C. Olson, Valerie Pearsall
    Roberts, FDIC Delays the PPIP Legacy Loan Program to Focus on Public-
    Private Programs to Sell Assets from Failed Bank, Jones Day (June 2009)
    (online at www.jonesday.com/pubs/pubs_detail.aspx?pubID=S6324).
    ---------------------------------------------------------------------------
        By the end of its existence, the RTC had disposed of more
    than $450 billion in assets, representing nearly 98 percent of
    the assets that were its responsibility, and resolved 747
    failed thrifts.\100\ Although the RTC ultimately realized
    losses from its investments, the losses were lower than the
    estimates made during the early- and mid-1990s, and the cost of
    intervention declined every year after 1991.\101\ The savings
    resulted in part from the RTC's decision to follow conservative
    accounting principles and its efforts to avoid overvaluing the
    assets it had acquired.\102\ In addition, the RTC benefited
    from the economic recovery of the 1990s, which lessened the
    rate of thrift failures and increased the prices that the RTC
    could get for its thrift asset holdings.\103\
    ---------------------------------------------------------------------------
        \100\ See Managing the Crisis: The FDIC and RTC Experience, supra
    note 98; see also Lee Davison, The Resolution Trust Corporation and
    Congress, 1989-1993, FDIC Banking Review, at 38 (Sept. 2006) (online at
    www.fdic.gov/bank/analytical/banking/2006sep/article2/article2.pdf).
        \101\ See The Cost of the Savings and Loan Crisis: Truth and
    Consequences, supra note 71, at 33.
        \102\ See id.
        \103\ Early estimates of the losses were lower, in part because the
    forecasts had not predicted the full extent of the crisis. See id.
    ---------------------------------------------------------------------------

    3. Lessons from the RFC and the RTC

        The RFC and the RTC were both established during
    extraordinary circumstances.\104\ For the RFC, the market
    collapse of the Great Depression and the needs of the New Deal
    programs ultimately vested the agency with a role as an all-
    things lender and fixer. The RTC, by contrast, had a more
    limited brief: to organize and dispose of the mess left by the
    savings and loan crisis. TARP funds are not directly available
    for the wide variety of possible recipients that received RFC
    funds,\105\ and in that sense the TARP is more targeted. Unlike
    the RTC, however, Treasury under the TARP has intervened in
    multiple types of market failures, and has not restricted its
    actions to just one sector.
    ---------------------------------------------------------------------------
        \104\ For additional discussion of the RFC and the RTC, see COP
    April Oversight Report, supra note 69, at 35-41, 44-50.
        \105\ See Jones, supra note 74, at 190.
    ---------------------------------------------------------------------------
        In addition, Treasury is not predominantly acting to
    liquidate the entities that are part of the TARP, as did the
    RTC. Accordingly, it is difficult to draw too many parallels
    between Treasury's management of the TARP and either the RFC or
    the RTC. At a more abstract level, the crises to which the RTC
    and the RFC responded involved the sequential failure of
    multiple regulated entities over several years prior to
    government intervention.\106\ By contrast, the TARP developed
    in response to rapidly-unfolding market events for which, in
    some cases, there was no obvious precedent. That said, however,
    in each situation--sale and management of assets for the RTC,
    unwinding of investments for the RFC--the U.S. government found
    itself in the position of a money-manager and/or conservator of
    private sector assets, from which they ultimately divested,
    over time, with attention to available returns and protection
    of government funds. When the RFC and the RTC had completed
    their tasks, they were dissolved.
    ---------------------------------------------------------------------------
        \106\ See COP April Oversight Report, supra note 69, at 35-41, 44-
    50.
    ---------------------------------------------------------------------------
        Treasury has informed the Panel that it interprets its
    obligations in a way that, while not precisely analogous to the
    RFC and RTC precedents, appears to rest on similar principles.
    Like its predecessors, Treasury has stated that it intends to
    act as a reluctant shareholder and to exit while maximizing
    returns and preserving stability.\107\ Treasury has stated that
    it does not intend to interfere with day-to-day business
    decisions, relying instead on the management of the covered
    entities, although Treasury has initiated board and management
    changes in some situations (for example, with General Motors),
    much as the RFC did in some situations.\108\ Similarly,
    Treasury is experimenting with public-private partnerships to
    manage and dispose of its assets.
    ---------------------------------------------------------------------------
        \107\ See Section D.2, infra (discussing the ``three pillars'').
        \108\ See Congressional Oversight Panel, September Oversight
    Report: The Use of TARP Funds in the Support and Reorganization of the
    Domestic Automotive Industry, at 20 (Sept. 9, 2009) (online at
    cop.senate.gov/documents/cop-090909-report.pdf) (hereinafter ``COP
    September Oversight Report'').
    ---------------------------------------------------------------------------

                           D. Disposal of the Assets

    1. Introduction

        Treasury currently holds assets and obligations as part of
    a number of different programs created under the TARP. These
    programs differ in scope, size, and state of maturity. The
    largest and most prominent use of TARP funding has been
    Treasury's injections of capital into financial institutions.
    There are three different capital injection programs under the
    TARP. The Capital Purchase Program (CPP) is the largest; under
    the CPP, 707 banks received capital injections totaling nearly
    $205 billion. The Targeted Investment Program (TIP) and
    American International Group, Inc. Investment Program (AIGIP),
    formerly known as the Systemically Significant Failing
    Institutions Program (SSFI),\109\ are narrower efforts aimed at
    large institutions that Treasury and the bank regulators
    considered critical to the functioning of the financial
    system.\110\ The only institutions that received TIP funds were
    Citigroup and Bank of America, each of which received $20
    billion. AIG, which has received approximately $45.3 billion
    through AIGIP/SSFI to date, is that program's only beneficiary.
    Treasury has also provided capital assistance to banks outside
    the capital injection programs. Through the Asset Guarantee
    Program (AGP), Treasury, the FDIC, and the Federal Reserve
    guaranteed approximately $250.4 billion \111\ in Citigroup
    assets until the termination of this program on December 23,
    2009. Three other programs--TALF, PPIP and the small business
    initiative--account for a further $65 billion of TARP funds.
    ---------------------------------------------------------------------------
        \109\ Treasury, without public announcement, recently changed the
    name of the TARP's SSFI Program to the more positive sounding American
    International Group, Inc. Investment Program. The Panel was made aware
    of this change only after reviewing OFS' recently issued TARP financial
    statements for fiscal year 2009.
        \110\ See U.S. Department of the Treasury, Joint Statement by
    Treasury, Federal Reserve and the FDIC on Citigroup (Nov. 23, 2008)
    (online at www.treas.gov/press/releases/hp1287.htm) (hereinafter
    ``Joint Statement on Citigroup'') (stating that the decision to provide
    Citigroup with TIP assistance was based on the government's commitment
    ``to supporting financial market stability, which is a prerequisite to
    restoring vigorous economic growth''); U.S. Department of the Treasury,
    Treasury, Federal Reserve and the FDIC Provide Assistance to Bank of
    America (Jan. 16, 2009) (online at www.treas.gov/press/releases/
    hp1356.htm) (stating that the objective of TIP is to ``foster financial
    market stability and thereby to strengthen the economy and protect
    American jobs, savings, and retirement security.''); U.S. Department of
    the Treasury, Treasury to Invest in AIG Restructuring Under the
    Emergency Economic Stabilization Act (Nov. 10, 2008) (online at
    www.treas.gov/press/releases/hp1261.htm) (hereinafter ``Treasury to
    Invest in AIG Restructuring Under EESA'') (highlighting that AIG is a
    ``systemically important company''); Board of Governors of the Federal
    Reserve System, Federal Reserve Board, with Full Support of the
    Treasury Department, Authorizes the Federal Reserve Bank of New York to
    Lend up to $85 billion to the American International Group (AIG) (Sept.
    16, 2008) (online at www.federalreserve.gov/newsevents/press/other/
    20080916a.htm) (hereinafter ``Federal Reserve Board authorizes lending
    to AIG'') (noting that the Federal Reserve Board ``determined that, in
    current circumstances, a disorderly failure of AIG could add to already
    significant levels of financial market fragility and lead to
    substantially higher borrowing costs, reduced household wealth, and
    materially weaker economic performance'').
        \111\ The $250.4 billion of Citigroup's assets reflected the value
    of the ring-fenced pool as of September 30, 2009. Citigroup Third
    Quarter 10-Q, supra note 56, at 35.
    ---------------------------------------------------------------------------

               FIGURE 1: NET INVESTMENT AMOUNT IN TARP BY MONTH

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    2. Treasury's TARP Exit Strategy

        Treasury must balance several potentially conflicting
    interests in managing its exit from the TARP. Because of the
    policy concerns related to the TARP and, more broadly, the
    requirements of EESA, Treasury has taken the position that it
    is not able to act simply as a prudent money-manager, seeking
    only an exit strategy that provides the best return on its
    investment.
        The policy goals of EESA are laid out in several sections
    of the statute. The overarching purpose of EESA is to
    ``immediately provide authority and facilities that the
    Secretary of the Treasury can use to restore liquidity and
    stability to the financial system of the United States.'' \112\
    While the Secretary ``may, at any time, exercise any rights
    received in connection with troubled assets purchased under''
    EESA,\113\ he must also specifically consider, among other
    concerns:
    ---------------------------------------------------------------------------
        \112\ 12 U.S.C. Sec. 5201(1).
        \113\ 12 U.S.C. Sec. 5216(a).
    ---------------------------------------------------------------------------
               Protecting the interests of taxpayers by
            maximizing overall returns and minimizing the impact on
            the national debt;
               Providing stability and preventing
            disruption to financial markets in order to limit the
            impact on the economy and protect American jobs,
            savings, and retirement security;
               The need to help families keep their homes
            and to stabilize communities;
               In determining whether to engage in a direct
            purchase from an individual financial institution, the
            long-term viability of the financial institution in
            determining whether the purchase represents the most
            efficient use of funds[.] \114\
    ---------------------------------------------------------------------------
        \114\ 12 U.S.C. Sec. 5213(1)-(4).
    ---------------------------------------------------------------------------
        Furthermore, the Secretary is to use his authority under
    EESA ``in a manner that will minimize any potential long-term
    negative impact on the taxpayer, taking into account the direct
    outlays, potential long-term returns on assets purchased, and
    the overall economic benefits of the program, including
    economic benefits due to improvements in economic activity and
    the availability of credit, the impact on the savings and
    pensions of individuals, and reductions in losses to the
    Federal Government.'' \115\ In carrying out this authority, the
    Secretary is to ``hold the assets to maturity or for resale for
    and until such time as the Secretary determines that the market
    is optimal for selling such assets, in order to maximize the
    value for taxpayers'' and ``sell such assets at a price that
    the Secretary determines, based on available financial
    analysis, will maximize return on investment for the Federal
    Government.'' \116\
    ---------------------------------------------------------------------------
        \115\ 12 U.S.C. Sec. 5223(a)(1).
        \116\ 12 U.S.C. Sec. 5223(a)(2).
    ---------------------------------------------------------------------------
        Treasury has interpreted its various obligations to require
    a management and exit strategy that rests on three pillars:
               Maintaining systemic stability;
               Preserving the stability of individual
            institutions; and
               Maximizing return on investment.\117\
    ---------------------------------------------------------------------------
        \117\ Treasury conversations with Panel staff (Dec. 3, 2009).
    ---------------------------------------------------------------------------
        Treasury officials have consistently stated that Treasury
    believes ``the U.S. government is a shareholder reluctantly and
    out of necessity'' and that Treasury ``intend[s] to dispose of
    [its] interests as soon as practicable, with the dual goals of
    achieving financial stability and protecting the interests of
    the taxpayers.'' \118\ This view, Treasury has stated, is
    consistent with EESA in that EESA does not specifically
    contemplate Treasury's taking positions in private companies or
    managing the day-to-day operations of these companies.\119\
    Treasury has also noted that the American system is premised on
    privately-owned industry and that it is therefore contrary to
    Treasury's nature as a government entity to hold shares in
    these companies. In an earlier meeting with Panel staff, a
    Treasury official noted that Treasury made its investments
    because it needed to stabilize the country's financial system,
    not because it needed a way to make money.\120\ For that
    reason, he stated, exit from any TARP position must be done in
    a way that promotes stability and the policy goals of EESA,
    even if that means that Treasury must hold securities longer
    than it would otherwise wish.
    ---------------------------------------------------------------------------
        \118\ House Oversight and Government Reform Committee, Subcommittee
    on Domestic Policy, Written Testimony of Assistant Secretary of the
    Treasury Herbert Allison, Jr., The Government As Dominant Shareholder:
    How Should the Taxpayers' Ownership Rights Be Exercised?, 111th Cong.
    (Dec. 17, 2009) (online at oversight.house.gov/images/stories/Allison_
    Testimony_for_Dec-17-09_FINAL_2.pdf) (hereinafter ``Allison Testimony
    before House Oversight and Government Reform Committee''). As part of
    his testimony, Secretary Allison also discussed the major principles
    guiding Treasury's role as a shareholder with regard to corporate
    governance issues. These principles were: (1) as a reluctant
    shareholder, Treasury intends to exit its positions as soon as
    practicable; (2) Treasury does not intend to be involved in the day-to-
    day management of any company; (3) Treasury reserves the right to set
    conditions on the receipt of public funds to ensure that ``assistance
    is deployed in a manner that promotes economic growth and financial
    stability and protects taxpayer value''; and (4) Treasury will exercise
    its rights as a shareholder in a commercial manner, voting only on core
    shareholder matters.
        \119\ Treasury conversations with Panel staff (Jan. 8, 2010).
        \120\ Treasury conversations with Panel staff (Dec. 3, 2009).
    ---------------------------------------------------------------------------
        Treasury's multi-faceted approach to managing and winding
    down this program raises issues regarding an assessment of
    Treasury's performance with respect to its exit. If Treasury's
    only obligation were to maximize profit, the public would be
    able to compare Treasury's yield with yields on other similar
    investments and reach a conclusion as to whether Treasury had
    fulfilled its mandate.\121\ Because Treasury identified a
    number of mandates to fulfill, any action that fails to fulfill
    one may be attributed to a step toward fulfilling another.
    Furthermore, two of the three pillars do not lend themselves to
    quantitative measures of performance.
    ---------------------------------------------------------------------------
        \121\ The comparison would be an imperfect one because no two
    investments are identical.
    ---------------------------------------------------------------------------
        Because of the various policy concerns at issue and the
    three-pillar approach to TARP strategy laid out above, Treasury
    reads its obligation to sell at a time that is ``optimal'' to
    encompass not only a determination that such a sale will
    directly maximize the benefit to taxpayers by fetching the
    highest price, but also a determination that the sale will at
    least not undermine systemic stability.\122\ While the section
    of the statute in which this language resides states that the
    sale must be at the time determined to be ``optimal . . . to
    maximize the value for taxpayers,'' this section also applies
    directly to an earlier subpart that directs the Secretary to
    use his authority under EESA to minimize long-term negative
    impact on taxpayers, taking into account ``the direct outlays,
    potential long-term returns on assets purchase, and the overall
    economic benefits of the program, including economic benefits
    due to the improvements in economic activity and the
    availability of credit, the impact on the savings and pensions
    of individuals, and reduction in losses to the Federal
    Government.'' \123\
    ---------------------------------------------------------------------------
        \122\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \123\ 12 U.S.C. Sec. 5223(a)(1).
    ---------------------------------------------------------------------------
        While this position may be the best way to meet the various
    policy goals outlined above, it may prevent Treasury from
    taking advantage of a true buy-and-hold strategy that would
    allow greater profits from companies on a strong upward trend
    over a years-long period. Such a strategy would, however,
    conflict with Treasury's position as a ``reluctant
    shareholder'' because it would require Treasury to hold shares
    for a long period of time.
        These policy considerations raise an additional question:
    to what extent will Treasury's actions, whatever they may be,
    affect the markets? Not only is there the potential for
    Treasury's actions to have such an effect simply because
    Treasury's presence in the market is unlike that of a private
    firm, but the potential also exists for purposeful impact on
    the markets. This potential might conflict with Treasury's
    stated goal of minimizing government intervention in the
    markets and may raise objections from market participants who
    might claim that Treasury was deliberately disrupting the
    market. Treasury's statements to date have not explained how it
    will address this conundrum.
        Although Treasury's exit strategy from the TARP has not
    always been transparent to the American public, Treasury has
    now clearly articulated the principles upon which it is
    operating with respect to exit strategy, however obscure the
    eventual application of those principles may be.\124\ The Panel
    does not take a view either with respect to Treasury's
    ``reluctant shareholder'' approach or with respect to the
    strategy that Treasury is following, but it acknowledges that
    the approach has been enunciated with the objective of
    articulating a policy. In meetings and calls with the managers
    of the various asset classes at Treasury, those managers were
    consistent in their articulation of the exit strategy and the
    principles driving it.\125\
    ---------------------------------------------------------------------------
        \124\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118; Treasury conversations with Panel
    staff (Dec. 3, 2009); see Congressional Oversight Panel, January
    Oversight Report: Accountability for the Troubled Asset Relief Program,
    at 4 (Jan. 9, 2009) (online at cop.senate.gov/documents/cop-010909-
    report.pdf).
        \125\ In the course of drafting this report, Panel staff conducted
    extensive discussions with the managers of the various asset classes at
    Treasury. See, e.g., Treasury conversations with Panel staff (Dec. 15,
    2009, Dec. 16, 2009, and Jan. 5, 2010) (discussing Citigroup and AIG).
    ---------------------------------------------------------------------------
        By comparison, in a previous Report the Panel suggested
    that Treasury consider dealing with the shareholder duties that
    have emerged from its investments in troubled companies by
    placing those investments in a privately managed trust,\126\
    thereby segregating these functions from the other oversight
    and intervention obligations occasioned by the TARP.
    ---------------------------------------------------------------------------
        \126\ See COP September Oversight Report, supra note 108, at 5.
    ---------------------------------------------------------------------------
        The principal benefit of such a trust would be that the
    assets could be managed for the sole benefit of the U.S.
    Treasury, and would be insulated from undue political
    influence.\127\ While the creation of such a trust is
    authorized by the statute,\128\ and has been considered by
    Treasury, Treasury has explained that the drawbacks of using a
    trust are currently outweighed by the benefits.\129\ The belief
    is that if a trust were created, it would be difficult to
    determine which assets should be placed in the trust, and it
    would be difficult to carry out Treasury's policy goals--which
    include promoting market stability in addition to maximizing
    the benefit to taxpayers.\130\ Treasury has also indicated that
    statutory requirements may prevent the implementation of a
    trust managed by an independent trustee, because of EESA's
    requirements for the Secretary to maintain supervision over
    investments held by vehicles established by Treasury. Treasury
    has not ruled out the use of such a trust when only a small
    pool of assets remain.\131\
    ---------------------------------------------------------------------------
        \127\ Treasury statements make it clear that Treasury sees a clear
    distinction between ``managing assets'' (which Treasury sees as the
    government's role) and ``managing companies'' (which Treasury does not
    see as its role). Allison Testimony before House Oversight and
    Government Reform Committee, supra note 118, at 5-6. While Treasury is
    clearly able to manage assets outside a trust, Treasury's direct
    involvement in, for example, deciding when to sell Citigroup shares,
    has the potential to send unintended signals to the markets, which
    signals would be tempered if a trustee were making the decisions.
    Additionally, while Treasury intends to vote its shares only on
    ``core'' shareholder matters, there are non-core matters that may be
    presented to shareholders where a failure to vote could lead to a
    governance vacuum and where a trustee could prove useful.
        \128\ 12 U.S.C. Sec. 5219(c).
        \129\ Treasury conversation with Panel staff (Dec. 15, 2009).
    Trusts are also as prone as any group of people to suffer from
    disagreements among members or other internal politics.
        \130\ Treasury conversation with Panel staff (Dec. 15, 2009).
        \131\ Treasury conversation with Panel staff (Dec. 15, 2009).
    ---------------------------------------------------------------------------
        The Panel is concerned that, although Treasury has been
    consistent in its description of its goals, the articulated
    principles are so broad that they provide Treasury with an easy
    means of justifying almost any decision--effectively giving no
    metric to determine whether Treasury's actions met its stated
    goals. Because either holding or selling, or a third approach,
    may alternatively be justified as maximizing profit, or
    maintaining the stability of significant institutions, or
    promoting systemic stability, almost any decision can be
    demonstrated to be forwarding one of these three principles.

    3. Accounting for the TARP

        EESA requires an annual financial statement prepared in
    accordance with generally accepted accounting principles and
    audited in accordance with generally accepted auditing
    standards.\132\ On December 10, 2009, Treasury issued financial
    statements for the TARP for the federal fiscal year ending
    September 30, 2009.\133\ The statements disclose that
    Treasury's final estimate for the cost of the transactions
    undertaken in fiscal year 2009 is $41.6 billion, approximately
    $110 billion lower than earlier estimated. This sizeable
    ``downward reestimate'' reflects improved equity prices and
    lower projected loss rates on the investments made in 2009, as
    well as faster repayment of some of those investments than was
    initially anticipated. Similarly, over the full multi-year
    course of the TARP's operations, the expected cost of the
    program is now estimated at $141 billion, roughly $200 billion
    lower than was initially forecast.\134\ Of this estimated $141
    billion in losses, Treasury has acknowledged that roughly $60
    billion is attributable solely to the TARP investments in AIG
    and the auto companies.\135\
    ---------------------------------------------------------------------------
        \132\ 12 U.S.C. Sec. 5226(b)(1).
        \133\ See Government Accountability Office, Office of Financial
    Stability (Troubled Asset Relief Program) Fiscal Year 2009 Financial
    Statements (Dec. 2009) (online at www.gao.gov/new.items/d10301.pdf)
    (hereinafter ``OFS FY09 Financial Statements'').
        \134\ The TARP Financial Statements were released on December 10,
    2009. The Department of the Treasury issued a press release which
    stated, ``[a]s additional funds are disbursed, particularly for the
    housing initiative, the total cost of TARP is likely to rise, although
    it is anticipated to be at least $200 billion less than the $341
    billion estimate in the August 2009 Mid-Session Review.'' See U.S.
    Department of the Treasury, New Report Shows Higher Returns, Lower
    Spending Under TARP Than Previously Projected (Dec. 10, 2009) (online
    at ustreas.gov/press/releases/tg438.htm).
        \135\ See House Oversight and Government Reform Committee,
    Subcommittee on Domestic Policy, Transcript Testimony of Assistant
    Secretary of the Treasury for Financial Stability Herbert Allison, Jr.,
    The Government As Dominant Shareholder: How Should the Taxpayers'
    Ownership Rights Be Exercised?, 111th Cong., (Dec. 17, 2009) (online at
    oversight.house.gov/
    index.php?option=com_content&task=view&id=4722&Itemid=31) (hereinafter
    ``Allison Testimony Transcript'').
    ---------------------------------------------------------------------------
        The TARP financial statements were prepared in accordance
    with generally accepted accounting principles. EESA further
    requires that the budgetary cost of the TARP be calculated
    under the rules of the Federal Credit Reform Act. This ``credit
    reform'' treatment means that TARP transactions are discounted
    to reflect the time value of money and the market risk of those
    investments.\136\ As a result, the accounting and budget
    information that Treasury publishes for the TARP are a good
    measure of the economic value of the resources expended. The
    GAO audited the financial statements and stated that the Office
    of Financial Stability had maintained effective financial
    controls in all material respects.\137\
    ---------------------------------------------------------------------------
        \136\ See 12 U.S.C. Sec. 5232 (requiring that TARP transactions be
    measured for budget presentation purposes under credit reform
    procedures, but modified to reflect the market risk of those
    transactions).
        \137\ See OFS FY09 Financial Statements, supra note 133, at 1-2.
    GAO did note two internal control deficiencies in the OFS financial
    systems which OFS agreed to rectify.
    ---------------------------------------------------------------------------
        The next financial report on the TARP will be released by
    Treasury in early February 2010, at the time the President's
    2011 Budget is transmitted to the Congress. While normal
    practice has been not to provide a further update of a
    particular federal program's financial information until the
    time of the Midsession Review of the budget on July 15th,
    Treasury has indicated that it expects to release interim
    financial reports on TARP transactions sometime between
    February and July 2010. The financial statements and
    accompanying ``management's discussion and analysis'' (MD&A)
    provide discussion of the results of all the TARP
    programs.\138\ The notes to the statements are not easily
    accessible for a lay reader, but the MD&A is easier to read and
    includes a short executive summary.
    ---------------------------------------------------------------------------
        \138\ Panel staff compared the financial statements and MD&As with
    those of financial institutions, and also considered the MD&A in the
    light of the many pronouncements on MD&A disclosure by the Securities
    and Exchange Commission (SEC). The MD&A discusses each of the programs
    under the TARP, addressing the purpose and impact of each program, the
    way in which assets were acquired, their current value, and the
    principles informing Treasury's management of the assets. The most
    significant criticisms that could be made of the MD&A are that: (a) a
    more thorough explanation of the accounting principles used would be
    helpful, as the notes to the financial statements, while thorough, are
    not written with the lay reader in mind; (b) more ``forward-looking
    information'' and a more expansive discussion of ``trends and
    uncertainties'' would be helpful; and (c) the graphic design and layout
    is distracting and inconsistent and could have benefitted from some
    reader-friendly, ``plain English'' editing. The second and third points
    are mitigated to some extent by the Executive Summary, which not all
    financial institutions provide, although the SEC encourages it.
    Commentators had urged that Treasury produce such disclosure. See
    Pollock COP Testimony, supra note 86, at 6.
    ---------------------------------------------------------------------------

    4. CPP Preferred and Warrants

                a. Acquisition of Assets and Current Value
        Under the CPP, Treasury provided capital to financial
    institutions by purchasing senior preferred stock (CPP
    Preferred) or subordinated debentures. The purchases were made
    pursuant to a ``Securities Purchase Agreement'' (SPA), which
    has standard terms for most banks.\139\ In addition, Treasury
    received warrants in order to give taxpayers ``an opportunity
    to participate in the equity appreciation of the institution.''
    \140\ The CPP Preferred, which has no maturity date, pays
    quarterly dividends at a rate of five percent per year for the
    first five years, and nine percent thereafter.\141\ The issuing
    financial institution may redeem the CPP Preferred at any time,
    subject to the requirement that regulators must approve the
    repayment.\142\ The warrants, which have a 10-year life, may be
    exercised at any time.\143\ The exercise price of the warrants
    for public financial institutions is based upon the 20-day
    average stock price of the underlying common shares.\144\ For
    non-public financial institutions, the exercise price is $0.01
    per share.\145\
    ---------------------------------------------------------------------------
        \139\ The terms of SPAs vary somewhat by institution type--public,
    private, S-corporation, mutual holding company or mutual bank--but are
    substantially similar. See Congressional Oversight Panel, July
    Oversight Report: TARP Repayments, Including the Repurchase of Stock
    Warrants, at 7 (July 10, 2009) (online at cop.senate.gov/documents/
    cop_071009_report.pdf) (hereinafter ``COP July Oversight Report'').
        \140\ See U.S. Department of the Treasury, Factsheet on Capital
    Purchase Program (updated Mar. 17, 2009) (online at
    www.financialstability.gov/roadtostability/CPPfactsheet.htm)
    (hereinafter ``CPP Factsheet''); see also COP July Oversight Report,
    supra note 139, at 6 (``[W]arrants may be traded on public or private
    markets, and they can be highly valued by investors who believe the
    share price of the issuing company is likely to rise above the strike
    price'').
        \141\ Dividends are cumulative for bank holding companies and their
    subsidiaries, and non-cumulative for banks. See COP July Oversight
    Report, supra note 139, at 8.
        \142\ See id., at 10-11.
        \143\ Id., at 8.
        \144\ The warrant exercise price is calculated taking the average
    of the closing prices for the 20 trading days up to and including the
    day prior to the date on which the TARP Investment Committee recommends
    that the Assistant Secretary for Financial Stability approve the
    investment. See U.S. Department of the Treasury, FAQs on Capital
    Purchase Program Repayment and Capital Assistance Program, at 2 (May
    2009) (online at www.financialstability.gov/docs/FAQ_CPP-CAP.pdf). In
    addition, the number of warrants issued is equal to 15 percent (5
    percent for a private financial institution) of the face value of the
    preferred investment divided by the exercise price. See U.S. Department
    of the Treasury, Term Sheet for CPP Preferred (online at
    www.financialstability.gov/docs/CPP/termsheet.pdf) (hereinafter ``Term
    Sheet for CPP Preferred'').
        \145\ U.S. Department of the Treasury, TARP Capital Purchase
    Program (Non-Public QFIs, excluding S Corps and Mutual Organizations)
    (online at www.financialstability.gov/docs/CPP/Term%20Sheet%20-
    %20Private%20C%20Corporations.pdf).
    ---------------------------------------------------------------------------
        CPP funding ended on December 29, 2009.\146\ The program
    provided approximately $205 billion in capital to 707 financial
    institutions.\147\ CPP funding for qualifying financial
    institutions was based upon the size of the institution.\148\
    Of the 19 stress-tested financial institutions, 17 institutions
    received $164 billion through CPP funding.\149\ As noted above,
    the issuing financial institution may redeem the CPP Preferred
    at any time, subject to the requirement that regulators must
    approve the repayment.\150\ The redemption price of the CPP
    Preferred is set by the SPA, which provides that the shares are
    to be redeemed at the principal amount of the debt.\151\
    Subject to compliance with applicable securities laws, Treasury
    also has the ability to ``sell, assign, or otherwise dispose
    of'' the CPP Preferred it holds.\152\ This means that the CPP
    Preferred could in theory be sold in private transactions to
    interested investors, or they could be offered to the public in
    a resale registered with the SEC.\153\ The CPP-recipient
    institutions that report to the SEC are required, under the
    terms of the SPAs, to file a shelf registration statement,
    which would permit sales to the public.\154\ Treasury is not
    limited to public sales, however, and could make sales in
    private transactions exempt from or not subject to SEC
    registration.
    ---------------------------------------------------------------------------
        \146\ Treasury conversations with Panel staff (Jan. 8, 2010). The
    application process ended on November 21, 2009. See U.S. Department of
    the Treasury, FAQ on Capital Purchase Program Deadline (online at
    www.financialstability.gov/docs/
    FAQ%20on%20Capital%20Purchase%20Program%20Deadline.pdf).
        \147\ Treasury conversations with Panel staff (Jan. 8, 2010). See
    also U.S. Department of Treasury, Troubled Asset Relief Report, Monthly
    105(a) Report--December 2009, at 10 (Jan. 11, 2010) (online at
    financialstability.gov/docs/105CongressionalReports/
    December%20105(a)_final_1-11-10.pdf) (hereinafter ``Monthly 105(a)
    Report'').
        \148\ As stated in the term sheets for both public and private
    institutions, ``[e]ach [qualifying financial institution] may issue an
    amount of Senior Preferred equal to not less than 1% of its risk-
    weighted assets and not more than the lesser of (i) $25 billion and
    (ii) 3% of its risk weighted assets.'' See Term Sheet for CPP
    Preferred, supra note 144, at 1. Risk weighted assets are the total
    assets of a financial institution, weighted for credit risk. See U.S.
    Department of the Treasury, Decoder (online at
    www.financialstability.gov/roadtostability/decoder.htm) (hereinafter
    ``Treasury Decoder'').
        \149\ MetLife, Inc. did not receive CPP funding. In addition, GMAC
    received $13.4 billion under the Automotive Industry Financing Program.
    See Section D.8, infra.
        \150\ See COP July Oversight Report, supra note 139, at 10-11.
        \151\ See COP July Oversight Report, supra note 139, at 10-11.
        \152\ See U.S. Department of the Treasury, Securities Purchase
    Agreement: Standard Terms, at Sec. 4.4 (online at
    www.financialstability.gov/docs/CPP/spa.pdf) (accessed Jan. 4, 2010).
        \153\ The CPP financial institutions that report to the SEC are
    required, under the terms of the SPA, to file a shelf registration
    statement, which would permit sales to the public. See SPA
    Sec. 4.5(a)(i). In addition, Treasury could make sales in private
    transactions exempt from or not subject to SEC registration.
        \154\ See SPA, supra note 153, at 4.5(a)(ii). A shelf registration
    statement allows the financial institution to offer and sell its
    securities for a period of up to two years. With the registration ``on
    the shelf,'' the financial institution, by simply updating regularly
    filed annual and quarterly reports to the SEC can sell its shares in
    the market as conditions become favorable with a minimum of
    administrative preparation and expense.
    ---------------------------------------------------------------------------
        After redemption of its CPP Preferred, a financial
    institution may also repurchase its warrants,\155\ the warrants
    are ``detachable'' from the CPP Preferred,\156\ which means
    that they can trade separately. Treasury is required to
    purchase the warrants at ``fair market value.'' \157\ The fair
    market value is determined using a negotiation and appraisal
    process between Treasury and the financial institution.\158\ If
    a financial institution does not wish to repurchase its
    warrants,\159\ or the parties cannot agree on a fair price and
    neither party wishes to invoke the appraisal procedure,
    Treasury will, as a matter of policy, auction the warrants to
    the public.\160\ Treasury staff has stated that it is
    Treasury's policy to dispose of the warrants as soon as
    practicable.\161\ Therefore, a financial institution may
    repurchase its warrants as soon as it redeems its preferred
    shares.\162\ To date, of the 58 \163\ financial institutions
    that have redeemed fully their CPP Preferred, 31 \164\
    financial institutions have also repurchased their warrants
    \165\ and Treasury has received approximately $2.9 billion from
    warrant redemptions.\166\ In addition, as discussed in Section
    D.4.b below, Treasury has received approximately $1.1 billion
    in gross proceeds from third-party auction sales. The following
    table shows the valuation of Treasury's current holdings of CPP
    Preferred, common shares, and warrants as of December 31, 2009.
    In addition, the table shows the fair value (Net Asset Value)
    of Treasury's CPP Preferred and common share holdings.
    ---------------------------------------------------------------------------
        \155\ OFS Chief Counsel Timothy Massad confirmed in a meeting with
    Panel staff on December 15, 2009 that if Treasury sold its CPP
    Preferred to third party, a financial institution would be allowed to
    repurchase its warrants once the sale is completed. Treasury
    conversations with Panel staff (Dec. 15, 2009). See also COP July
    Oversight Report, supra note 139, at 8-17 (discussing the history and
    legal aspects of repayment of CPP Preferred and warrants
        \156\ See SPA, supra note 153, at Sec. 1.2.
        \157\ See SPA, supra note 153, at Sec. 4.9(a).
        \158\ The repurchase process for a financial institution is a
    multi-step procedure starting with the institution's proposal to
    Treasury of its determination of the fair market value of the warrants.
    Treasury has a choice of whether to accept this proposed fair value. If
    Treasury and the financial institution are unable to agree on the fair
    value determination, either party may invoke the appraisal procedure.
    In the appraisal procedure process, both Treasury and the financial
    institution select independent appraisers. If the appraisers fail to
    agree, a third appraiser is hired, and subject to certain limitations,
    a composite valuation of the three appraisals is used to establish fair
    market value. This composite valuation is determined to be the fair
    market value and is binding on both Treasury and the financial
    institution. If the appraisal procedure is not invoked, and neither
    party can agree on the fair market value determination, Treasury then
    sells the warrants through the auction process. See Robert A. Jarrow,
    TARP Warrants Valuation Methods (Sept. 22, 2009) (online at
    www.financialstability.gov/Jarrow%20TARP%20
    Warrants%20Valuation%20Method.pdf) (hereinafter ``TARP Warrants
    Valuation Methods'').
        In addition, the process is different for private banks. Warrants
    of private financial institutions are immediately exercisable. See COP
    July Oversight Report, supra note 139, at 11.
        \159\ After the CPP preferred is redeemed, the financial
    institution has 15 days to decide whether it wishes to repurchase its
    warrants. See U.S. Department of the Treasury, Treasury Announces
    Warrant Repurchase and Disposition Process for the Capital Purchase
    Program (June 26, 2009) (online at www.financialstability.gov/latest/
    tg_06262009.html).
        \160\ In November 2009, Treasury announced that it intended to
    conduct auctions to sell its warrant positions in JPMorgan Chase,
    Capital One Financial Corporation, and TCF Financial Corporation. The
    issuers were allowed to bid in these auctions. See U.S. Department of
    the Treasury, Treasury Announces Intent To Sell Warrant Positions in
    Public Dutch Auctions (Nov. 19, 2009) (online at www.ustreas.gov/press/
    releases/tg415.htm) (hereinafter ``Treasury Announces Intent To Sell
    Warrant Positions in Public Dutch Auctions'').
        \161\ See COP July Oversight Report, supra note 139.
        \162\ See id.
        \163\ Treasury conversations with Panel staff (Jan. 8, 2010). See
    also Monthly 105(a) Report, supra note 147, at 11.
        \164\ Treasury conversations with Panel staff (Jan. 8, 2010).
        \165\ In its July Report, the Panel analyzed the prices at which
    Treasury was allowing the financial institutions to repurchase the
    warrants. The Panel was concerned that Treasury was undervaluing the
    warrants and/or not negotiating strongly enough. See COP July Oversight
    Report, supra note 139, at 8-17. After the July report was released,
    several banks repurchased their warrants for prices very close to the
    Panel's valuation: notably, Goldman Sachs, Morgan Stanley, and American
    Express. Also after the release of the July Report, Treasury retained
    an expert to perform an independent review of its valuation
    methodology. He found that it was ``consistent with industry best
    practice and the highest academic standards.'' See TARP Warrants
    Valuation Methods, supra note 158.
        \166\ See U.S. Department of the Treasury, Troubled Asset Relief
    Program Transactions Report for Period Ending December 30, 2009 (Jan.
    4, 2010) (online at www.financialstability.gov/docs/transaction-
    reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf)
    (hereinafter ``TARP Transactions Report for Period Ending December 30,
    2009'').

     FIGURE 2: VALUATION OF CURRENT HOLDINGS OF CPP PREFERRED SHARES, COMMON SHARES, AND WARRANTS AS OF DECEMBER 31,
                                                          2009
    ----------------------------------------------------------------------------------------------------------------
                                      Preferred Shares  (billions of     Warrant Valuation  (millions of dollars)
                                                 dollars)            -----------------------------------------------
                                     --------------------------------
                                                         Net Asset
                                         Principal    Value as of 9/   Low Estimate    High Estimate   Best Estimate
                                          Amount       30/2009 \167\
    ----------------------------------------------------------------------------------------------------------------
    Stress-Tested Financial
     Institutions with CPP Preferred
     and/or Warrants Outstanding:
        Wells Fargo & Company.......           $0.00           $0.00         $313.02       $1,727.96         $829.57
        Bank of America Corporation             0.00            0.00          561.18        2,581.16        1,036.20
         \168\......................
        Citigroup, Inc. (Common                25.00           25.46            9.51          891.04          204.32
         Shares) \169\..............
        The PNC Financial Services              7.58            7.17           82.81          500.60          231.03
         Group Inc..................
        SunTrust Bank, Inc..........            4.85            4.14            5.67          252.90           98.15
        Regions Financial                       3.50            3.01            3.61          155.48           65.41
         Corporation................
        Fifth Third Bancorp.........            3.41            3.05           63.74          317.82          161.23
        KeyCorp.....................            2.50            1.94            5.59          108.70           49.48
        GMAC, LLC...................     \170\ 14.11      \171\ 7.17           \170\           \170\           \170\
    Failed Banks Enrolled in CPP:
        Pacific Coast National                  0.00            0.00       \172\ N/A             N/A             N/A
         Bancorp....................
        UCBH Holdings, Inc.\173\....            0.30            0.02            0.00            0.07            0.01
        CIT Group...................            2.33            0.00            0.00            3.19            2.84
    All Other Banks.................           33.53     \174\ 28.91        2,314.46        5,998.02        3,654.25
                                     -------------------------------------------------------------------------------
        Total.......................          $97.11          $80.87       $3,359.59      $12,536.94      $6,332.49
    ----------------------------------------------------------------------------------------------------------------
    \167\ Except for Citigroup, Net Asset Value for December 31, 2009 is not available. Net Asset Value is the per
      share value on September 30, 2009 as disclosed in the TARP Financial Audit Report. See OFS FY09 Financial
      Statements, supra note 133, at 36. Except for Citigroup, Inc., Net Asset Value is calculated by dividing the
      total value of all securities in the financial institution's portfolio, less any liabilities by the number of
      shares outstanding. See note 174, infra. The Net Asset Value of Citigroup was calculated using the common
      stock closing price of $3.31 on December 31, 2009 multiplied by Treasury's common ownership of 7.7 billion
      shares. On September 30, 2009, Citigroup's closing price was $4.84 per share.
    \168\ Warrant Valuation includes warrants outstanding from TIP investment (valuation of $459.1, $1,405.9, and
      $666.5 for Low, High, and Best Estimates, respectively).
    \169\ Warrant Valuation includes warrants outstanding from TIP (valuation of $6.4, $371.3, and $118.1 for Low,
      High and Best Estimates, respectively) and AGP investments (valuation of $2.3, $132.0, and $42.4 for Low,
      High, and Best Estimates, respectively).
    \170\ On December 30, 2009, Treasury provided an additional commitment to GMAC of approximately $3.8 billion.
      The $3.8 billion of new capital was provided in the form of $2.54 billion of Trust Preferred Securities
      (TruPs), which are senior to all other capital securities of GMAC, and $1.25 billion of Mandatory Convertible
      Preferred Stock (MCP). In addition, Treasury received warrants, which were exercised, to purchase an
      additional $127 million of TruPs and $63 million of MCP. U.S. Department of the Treasury, Treasury Announces
      Restructuring of Commitment to GMAC (Dec. 30, 2009) (online at ustreas.gov/press/releases/tg501.htm)
      (hereinafter ``Treasury Announces Restructuring of Commitment To GMAC''). See also Section D.8, infra.
    \171\ The Net Asset Valuation of GMAC was based $12.5 billion of preferred stock held by GMAC prior to the
      additional financing. Net Asset Value on December 31, 2009 is not available.
    \172\ Pacific Coast National Bancorp, 2008 Annual Report, Form 10-K, Part II, Item 5 (online at www.sec.gov/
      Archives/edgar/data/1302502/000092708909000143/p-10k123108.htm). There are no warrants currently outstanding
      for Pacific Coast National Bancorp. At the date of initial TARP CPP investment, Pacific Coast National issued
      a warrant to Treasury to purchase 206.00206 shares of its Fixed Rate Cumulative Perpetual Preferred Stock,
      Series B, which Treasury immediately exercised in a cashless transaction, per the Company's 2009 10-K. The
      valuation of Pacific Coast National's preferred shares at September 30, 2009 was approximately $154,000.
    \173\ Agency Financial Statement 2009, supra note 32, at 34-35. The Net Asset Value of UCBH Holdings, Inc.
      includes warrants.
    \174\ Treasury conversations with Panel staff (Jan. 5, 2010). The Net Asset Value of ``All Other Banks'' was
      provided by OFS as an aggregate value. This is due to the inherent constraints of the model created and used
      by OFS in its valuation of CPP preferred stock and warrants, as discussed with the OFS modeling team on
      December 22, 2009. In this regard, generating a net asset value for Treasury's investment in a specific
      financial institution requires each institution to be separately modeled. The man-hours and model run-time
      required prevent each financial institution from being modeled separately. As such, OFS has valued the stress-
      tested financial institutions and those receiving the largest CPP investment and has provided an aggregate net
      asset value for Treasury's holdings in the remaining financial institutions.

        Of the 19 stress-tested financial institutions, there are
    currently six that have not repaid their TARP funding.\175\ One
    of the six is GMAC, which is discussed later in Section D.8.
    ---------------------------------------------------------------------------
        \175\ MetLife, Inc. did not receive any funding. See Congressional
    Oversight Panel, June Oversight Report: Stress Testing and Shoring Up
    Bank Capital, at 15 (June 9, 2009) (online at cop.senate.gov/documents/
    cop-060909-report.pdf) (hereinafter ``COP June Oversight Report''). As
    of December 31, 2009, the following stress tested banks have not repaid
    their TARP funding: PNC Financial Services Group, SunTrust Banks, Inc.,
    Regions Financial Corp., Fifth Third Bancorp, Keycorp, and GMAC LLC.
    See TARP Transactions Report for Period Ending December 30, 2009, supra
    note 166.
    ---------------------------------------------------------------------------
                b. Disposal of CPP Assets and Recovery of TARP Funds
        In September 2009, Treasury issued a report that discussed
    the next phase of its financial and rehabilitation efforts--
    what it describes as ``moving from rescue of our financial
    system to a period of stabilization, rehabilitation and
    rebuilding.'' \176\ The report stated that the ``next phase
    will focus on winding down those programs that were once
    necessary to prevent systemic failure.'' \177\
    ---------------------------------------------------------------------------
        \176\ See U.S. Department of the Treasury, The Next Phase of
    Government Financial Stabilization and Rehabilitation Policies, at 1
    (Sept. 14, 2009) (online at www.treas.gov/press/releases/docs/
    Next%20Phase%20of%20Financial%20Policy,%20Final,%202009-09-14.pdf)
    (hereinafter ``Treasury Status Report on Financial Stabilization'').
        \177\ See Treasury Status Report on Financial Stabilization, supra
    note 176, at 1.
    ---------------------------------------------------------------------------
        The report stated that Treasury anticipated financial
    institutions would repay another $50 billion in CPP Preferred
    over the next 12 to 18 months.\178\ To date, Treasury has
    received approximately $122 billion from CPP recipients through
    principal repayments of preferred stock repurchases, an amount
    in excess of the September projection.\179\ The report does not
    discuss the timing of repayment of the remaining balance of
    approximately $58 billion,\180\ which largely comprises
    investments in approximately 600 smaller financial
    institutions. In this regard, Treasury has stated that it is
    looking at ``lots of possibilities,'' including market sales,
    but it is ``nowhere near'' a decision process.\181\ These
    smaller financial institutions have not publicly disclosed
    their intended exit strategy for CPP repayment. Non-disclosure
    by these financial institutions may be due to the fact that the
    banking regulators have not specifically disclosed their
    criteria for allowing a financial institution to redeem its CPP
    Preferred and the fact that some of these institutions may be
    unable to redeem due to high loan losses and ``vulnerable
    capital ratios.'' \182\
    ---------------------------------------------------------------------------
        \178\ See Treasury Status Report on Financial Stabilization, supra
    note 176, at 3.
        \179\ The $50 billion of projected repayments was based upon total
    repayments of approximately $70 billion received by September 30, 2009.
    See Treasury Status Report on Financial Stabilization, supra note 176,
    at 3. In addition, Treasury estimated that total bank repayments
    ``could reach up to $175 billion by the end of 2010.'' See Treasury
    Announces Intent To Sell Warrant Positions in Public Dutch Auctions,
    supra note 160.
        \180\ The remaining balance owed is based upon the cash outlay of
    $205 billion less cash repayments of $122 billion less $25 billion of
    Citigroup's common shares.
        \181\ Treasury conversations with Panel staff (Dec. 15, 2009).
        \182\ Some financial institutions may continue to need the CPP
    funding due to ``staggering loan losses and vulnerable capital
    levels.'' See Kevin Dobbs, For Some Regional Banks, TARP remains
    necessary (Jan 5, 2010) (online at snl.com/InteractiveX/article.aspx?
    Id=10545545&KPLT=4).
    ---------------------------------------------------------------------------
        Although Treasury has the ability to sell its CPP Preferred
    to third parties either in a private or public offering, it
    currently has no plans to use third-party sales.\183\ Treasury
    stated in the TARP Financial Statements that although ``it has
    not exercised these rights, it may do so in the future.'' \184\
    Treasury's preference, however, as it stated in the TARP
    Financial Statements and in meetings with Panel staff, is to
    hold the preferred stock with the objective of receiving
    redemption in full from the CPP participant, as opposed to
    selling to third parties at a likely discount.\185\ Similarly,
    in the event of a severe downturn in the market, Treasury
    indicated that it would not immediately sell its CPP
    investments. Treasury stated that it would need to evaluate its
    investment objectives (i.e., minimization of costs,
    maximization of returns to the taxpayers, and preservation of
    market stability), before it would sell those investments. In
    this regard, as stated in the TARP Financial Statements,
    ``Treasury-OFS must also consider the limited ability to sell
    an investment to a third party due to the absence of a trading
    market or lack of investor demand, and the possibility of
    achieving potentially higher returns through a later
    disposition.'' \186\ Accordingly, Treasury has not decided at
    what point the option of selling to third parties might be used
    for any of the investments it currently holds, but has stated
    that this remains a possible mode of exit to be considered in
    the future.\187\
    ---------------------------------------------------------------------------
        \183\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \184\ Treasury conversations with Panel staff (Dec. 3, 2009);
    Treasury conversations with Panel staff (Dec. 15, 2009); See also OFS
    FY09 Financial Statements, supra note 133, at 73.
        \185\ Treasury conversations with Panel staff (Dec. 15, 2009).
        \186\ See OFS FY09 Financial Statements, supra note 133, at 68-69.
        In connection with warrant sales, the Panel stated in its July
    report that ``Treasury would be more likely to maximize taxpayer
    returns if it sold the warrants through auctions,'' since the process
    is straightforward. See COP July Oversight Report, supra note 139.
        \187\ Treasury conversations with Panel staff (Dec. 3, 2009);
    Treasury conversations with Panel staff (Dec. 15, 2009). However, the
    Panel recommended in its June report that ``[t]he CPP repayment process
    should be more transparent.'' See COP June Oversight Report, supra note
    175.
    ---------------------------------------------------------------------------
        With respect to a CPP recipient's warrants, to date it has
    been Treasury's policy to conduct third party sales by
    auction.\188\ As a result, Treasury has somewhat less leeway
    with respect to the disposal of warrants than it does with
    respect to the CPP Preferred. Upon redemption of its CPP
    Preferred, a financial institution has 15 days to elect whether
    it will repurchase its warrants. If it does not, Treasury will
    sell the warrants through auction sales.\189\ In December 2009,
    Treasury conducted auctions to sell its warrant positions in
    JPMorgan Chase, Capital One, and TCF Financial Corporation, and
    received approximately $1.1 billion in gross proceeds.\190\
    Treasury informed Panel staff that the next auction sale will
    not take place before February 2010.\191\
    ---------------------------------------------------------------------------
        \188\ In November 2009, Treasury announced that it would conduct
    auctions for warrant positions it holds in financial institutions that
    have repaid CPP investments and do not reach agreement with Treasury on
    the warrant price. The auctions are done through a modified Dutch
    auction methodology that establishes a market price by allowing
    investors to submit bids at specified increments above a minimum price
    specified for each auction. See, Treasury Announces Intent To Sell
    Warrant Positions in Public Dutch Auctions, supra note 160.
        \189\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \190\ Gross proceeds received for JPMorgan Chase, Capital One, and
    TCF Financial Corporation were approximately $950 million, $148
    million, and $9 million, respectively. See TARP Transactions Report for
    Period Ending December 30, 2009, supra note 166.
        \191\ Treasury conversations with Panel staff (Dec. 3, 2009).
    ---------------------------------------------------------------------------
        As of December 31, 2009, 60 financial institutions,
    including three that have declared bankruptcy, had outstanding
    dividend payments to Treasury of approximately $140
    million.\192\ TARP-recipient financial institutions pay two
    different kinds of dividends--cumulative dividends, which are
    paid by bank holding companies and their subsidiaries, and non-
    cumulative dividends, which are paid by banks--with different
    consequences for the funds' potential recovery. When CPP
    Preferred are redeemed, if cumulative dividends remain unpaid,
    Treasury will be paid any accrued and unpaid dividends.
    However, non-cumulative dividends do not have to be paid,
    unless such dividends have been accrued.\193\
    ---------------------------------------------------------------------------
        \192\ See SIGTARP, Quarterly Report to Congress, at 58 (Oct. 21,
    2009) (online at www.sigtarp.gov/reports/congress/2009/
    October2009_Quarterly_Report_to_Congress.pdf) (hereinafter ``SIGTARP
    October Report''). When institutions were given TARP assistance, there
    was no time to perform any due diligence in view of the immediacy of
    the situation. However, TARP was supposedly given to healthy banks but
    in many instances this was not the case. For example, Citigroup needed
    further assistance from the TARP. In addition there are further
    difficulties in valuing an institution once the government provides
    external support, since values tend to be inflated. See discussion
    below regarding the difficulties of valuation once there is government
    support. See also David Enrich, TARP Can't Save Some Banks, Wall Street
    Journal (Nov. 17, 2009) (online at online.wsj.com/article/
    SB10001424052748704538404574539954068634242.html).
        \193\ At December 31, 2009, non-cumulated dividends totaled
    approximately $2.4 million. Information provided by Treasury on January
    4, 2010.
    ---------------------------------------------------------------------------
        Of the $140 million in unpaid dividends, approximately $66
    million represented unpaid cumulative dividends from the three
    failed financial institutions.\194\ CIT filed for bankruptcy on
    November 1, 2009,\195\ while UCBH Holdings, Inc. (UCBH) and
    Pacific Coast National Bancorp (Pacific Coast) filed for
    bankruptcy on November 24, 2009, and December 17, 2009,
    respectively.\196\ Beyond dividend payments, the amount that
    can be recovered from these three failed institutions, if any,
    will depend on the outcome of the bankruptcy proceedings.\197\
    As shown in Figure 2, on September 30, 2009, Treasury's
    investment in CIT was valued at zero,\198\ and the aggregate
    value of Treasury's investments in UCBH and Pacific Coast
    totaled approximately $22.5 million.\199\
    ---------------------------------------------------------------------------
        \194\ Information provided by Treasury on January 4, 2010. On
    December 31,2009, CIT, UCBH Holdings, and Pacific Coast National
    Bancorp owed $58.3 million, $7.5 million, and $168,000 in dividends,
    respectively.
        \195\ See OFS FY09 Financial Statements, supra note 133, at 125.
        \196\ Treasury conversation with Panel staff (Jan. 7, 2010).
        \197\ See OFS FY09 Financial Statements, supra note 133.
        \198\ See OFS FY09 Financial Statements, supra note 133, at 36. See
    also Figure 2.
        \199\ The CPP investment in UCBH was valued at $22.5 million which
    include the warrants; the CPP Investment in Pacific Coast was valued at
    $154,000. See OFS FY09 Financial Statements, supra note 133, at 125.
    See also Figure 2.
    ---------------------------------------------------------------------------
        In certain circumstances, TARP recipients may seek approval
    from Treasury for exchange offers, recapitalizations, or other
    restructuring actions to improve their financial
    condition.\200\ Treasury evaluates each such proposal on a
    case-by-case basis, and before it grants approval of such
    transactions, it takes into account the following principles:
    \201\
    ---------------------------------------------------------------------------
        \200\ See OFS FY09 Financial Statements, supra note 133, at 70.
        \201\ See OFS FY09 Financial Statements, supra note 133, at 70-71.
    ---------------------------------------------------------------------------
               Pro forma capital position of the
            institution;
               Pro forma position of Treasury investment in
            the capital structure;
               Overall economic impact of the transaction
            to the government;
               Guidance of the institution's primary
            regulator; and
               Consistent pricing with comparable
            marketplace transactions.
        During 2009, two exchange transactions were completed. In
    August, Popular, Inc. completed an exchange of $935 million of
    preferred stock held by Treasury for an identical amount of
    newly issued trust preferred securities.\202\ Similarly, on
    December 11, 2009, Superior Bancorp completed an exchange of
    $69 million of preferred stock held by Treasury for an
    identical amount of newly issued trust preferred
    securities.\203\ Two exchange offers are currently pending with
    Independent Bank Corp \204\ and Midwest Banc Holdings.\205\
    Treasury has stated that exchange transactions will be approved
    only on a case-by-case basis once all the relevant information
    is evaluated.\206\
    ---------------------------------------------------------------------------
        \202\ Banco Popular paid Treasury a $13 million exchange fee. See
    SIGTARP October Report, supra note 192, at 61. See also, Popular, Inc.,
    Form 10-Q for the quarter ended September 30, 2009, at 60 (online at
    www.sec.gov/Archives/edgar/data/763901/000095012309060126/
    g20716e10vq.htm#107) (accessed Jan. 12, 2010).
        \203\ On December 14, 2009, Superior Bancorp filed with the SEC a
    Form 8-K which announced the completion of the exchange transaction
    with Treasury (online at www.sec.gov/Archives/edgar/data/1065298/
    000114420409064449/v168906_ex99.htm).
        \204\ On November 25, 2009, Independent Bank Corp. filed a
    preliminary proxy statement asking its shareholders to vote on a
    potential exchange of the bank's common stock for preferred stock held
    by Treasury. See Independent Bank Corp., Preliminary Proxy Statement
    filed by Independent Bank Corp on November 25, 2009 (Nov. 25, 2009)
    (online at www.sec.gov/Archives/edgar/data/39311/000092604409000561/
    ibc-prer14a_093009.htm).
        \205\ On December 3, 2009, Midwest Banc Holdings announced that it
    is in discussions with Treasury regarding an exchange transaction
    (online at www.sec.gov/Archives/edgar/data/1051379/000091384909000815/
    ex99-1.htm). Since this announcement, Midwest has entered into a
    written agreement with the Federal Reserve Bank of Chicago and the
    Illinois Department of Financial and Professional Regulation, Division
    of Banking (online at www.sec.gov/Archives/edgar/data/1051379/
    000095012309073372/c55234e8vk.htm).
        \206\ Treasury conversations with Panel staff (Dec. 15, 2009).
    ---------------------------------------------------------------------------
        Panel staff asked Treasury whether it has considered
    divestment alternatives such as a bundled sale of CPP Preferred
    issued by various banks. Treasury indicated that it would
    consider all types of divestment alternatives, especially in
    regard to the relatively small CPP investments in a large
    number of smaller institutions, as the program winds down. At
    present, however, the focus is on an institution-by-institution
    approach.
                c. Analysis of Intended Exit Strategy
        As noted above, CPP recipients may redeem their CPP
    Preferred only after receiving approval from their primary
    banking regulators.\207\ The banking regulators have not
    specifically disclosed their criteria for allowing a financial
    institution to redeem its CPP Preferred,\208\ a lack of clarity
    that has led to frustration at some banks.\209\ Until the
    banking regulators are more transparent about their redemption
    policies, the Panel cannot assess the propriety of Treasury's
    investment strategy, which is to hold onto the stock with the
    goal of eventually receiving redemption in full from the CPP
    recipient, rather than selling to another investor at a likely
    discount.
    ---------------------------------------------------------------------------
        \207\ If Treasury sells its investment in CPP Preferred to a third
    party, approval by a financial institution's primary regulator is not
    required. Treasury conversations with Panel staff (Dec. 15, 2009).
        \208\ As the Panel indicated in its August report, the banking
    regulators ``see the stress test and the repayment of assistance as
    working together to protect the bank's balance sheet;'' however
    ``supervisory flexibility underlies the stress test's assumptions.''
    See COP August Oversight Report, supra note 65, at 42.
        \209\ Bank of America, Citigroup, and SunTrust have all expressed
    their frustrations with the lack of clarity about the criteria for TARP
    repayment. In November, Bank of America announced that it was ready and
    willing to repay TARP but was ``waiting for the government to establish
    the appropriate time.'' See BofA, Feds at odds over when TARP gets
    repaid, Charlotte Observer (Nov. 24, 2009) (online at
    www.charlotteobserver.com/597/story/1072637.html). Similarly, Citigroup
    announced it was ready to repay its TARP funding, but said its
    regulators were undecided over the amount of capital it should raise.
    SunTrust's Chairman and CEO views ``the rules for repaying TARP
    assistance as ever-changing.'' See J. Scott Trubey, SunTrust CEO wants
    to repay TARP, Atlanta Business Chronicle (Sept. 15, 2009) (online at
    atlanta.bizjournals.com/
    atlanta/stories/2009/09/14/daily34.html); Samil Surendran, Citi's plan
    to exit TARP hits roadblock (Dec. 9, 2009) (online at www.snl.com/
    InteractiveX/article.aspx?ID=10454610&BeginDate=12/09/2009&KPLT=2);
    David Enrich, Banks, U.S. Spar Over TARP Repayments, Wall Street
    Journal (Dec. 7, 2009) (online at online.wsj.com/article/
    SB10001424052748704825504574582311943469506.html).
    ---------------------------------------------------------------------------
        In addition, at the Panel's December hearing Secretary
    Geithner could not definitively answer the Panel's questions in
    regard to the banking regulators' criteria for redemption. He
    stated that a financial institution would not be allowed to
    make repayments if it would ``leave the system or these
    financial institutions with inadequate capital.'' \210\ He
    further stated that a financial institution would be required
    to ``raise capital from the markets'' so that it ``can repay
    the taxpayer with interest.'' \211\ Secretary Geithner did not,
    however, provide a definitive answer about whether a financial
    institution would be required to raise the full amount of its
    TARP debt.\212\ Although it is the banking regulators'
    responsibility to disclose their criteria for allowing
    repayments, Treasury also should be able to articulate this
    policy in view of the broader economic issues it raises. This
    lack of clarity breeds uncertainty and instability in the
    financial markets and provides a disservice to taxpayers as
    well as investors.
    ---------------------------------------------------------------------------
        \210\ See Congressional Oversight Panel, Transcript of Hearing with
    Treasury Secretary Timothy Geithner (Dec. 10, 2009) (publication
    forthcoming) (online at http://cop.senate.gov/hearings/library/hearing-
    121009-geithner.cfm) (hereinafter ``Dec. 10 Hearing Transcript'').
        \211\ See Dec. 10 Hearing Transcript, supra note 210.
        \212\ See Dec. 10 Hearing Transcript, supra note 210.
    ---------------------------------------------------------------------------
        To prevent a truly healthy bank from repaying its TARP
    funding is a disservice to that bank's investors as well as
    taxpayers.\213\ It is, moreover, inconsistent with Treasury's
    ``systemic stability'' principle. Repayment is, or should be, a
    signal of health to the markets, and delaying repayment risks
    withholding valuable information from the markets. Permitting
    premature repayment for whatever reason, however, including
    escape from executive compensation limitations,\214\ serves no
    public purpose if the institution in question cannot survive on
    its own. Financial institutions in 2010 will be faced with a
    substantial amount of debt that will be maturing over the next
    few years.\215\ This fact could lead to the government having
    to decide whether to provide additional assistance if a
    repaying institution is not truly healthy. The Panel is
    concerned about reports of dissent among the banking
    supervisors and tensions between Treasury and the supervisors,
    and the extent to which institutions might be permitted to exit
    the TARP when not financially stable.\216\ The underlying issue
    here relates to the bank regulators' position that their
    assessment of a bank's condition should remain confidential in
    order to maximize their effectiveness in promoting bank safety
    and soundness. This traditional position of the regulators
    conflicts with the need for Treasury as investor in particular
    banks to know as much as possible about the financial condition
    of those banks. In these circumstances, the regulators'
    traditional lack of transparency may do a disservice to the
    taxpayers, investors, and to the marketplace in financial
    institutions' securities.
    ---------------------------------------------------------------------------
        \213\ Some commentators have pointed out that the replacement of
    CPP Preferred with common stock, which is generally more expensive,
    places an additional burden on the ability of a TARP recipient to earn
    its way back to profitability. See, e.g., James Kwak, Why Did Bank of
    America Pay Back the Money? (Dec. 4, 2009) (online at
    baselinescenario.com/2009/12/04/why-did-bank-of-america-pay-back-the-
    money/).
        \214\ For example, the financial press has indicated that
    Citigroup's and Bank of America's exit from TARP was due to the release
    of executive compensation restrictions, especially in view of Bank of
    America's CEO search. See, e.g., Bradley Keoun, Citigroup Said to Near
    Accord on TARP Repayment, US Stake Sale, Business Week (Dec. 13, 2009)
    (online at businessweek.com/bwdaily/dnflash/content/dec2009/
    db20091213_027634.htm); David Mildenberg, Bank of America TARP Payment
    May Aid Shares, Search, Bloomberg (Dec. 3, 2009) (online at
    bloomberg.com/apps/news?pid=20601087&sid=a8MHKJc4D3bc).
        \215\ Banks will have trillions of dollars of debt maturing over
    the next few years, potentially forcing them to refinance their debt at
    substantially higher rates. Data provided under subscription by
    BLOOMBERG Data Services (Instrument: Map Debt, filtered for average
    maturity date under 5 years). See also Carrick Mollenkamp and Serena
    Ng, Banks Scramble as Debt Comes Due, Wall Street Journal (Nov. 25,
    2009) (online at online.wsj.com/article/
    SB10001424052748703819904574554223793153390.html); Federal Deposit
    Insurance Corporation, FDIC Board Approves 2010 Operating Budget (Dec.
    15, 2009) (online at www.fdic.gov/news/news/press/2009/pr09228.html)
    (FDIC Chairman Sheila Bair explained that a 55 percent increase in the
    FDIC operating budget ``will ensure that we are prepared to handle an
    even-larger number of bank failures next year, if that becomes
    necessary, and to provide regulatory oversight for an even-larger
    number of troubled institutions'').
        \216\ See, e.g., David Enrich and Damian Paletta, Discord Behind
    TARP Exits, Wall Street Journal (Dec. 18, 2009) (``Bank regulators at
    the Federal Reserve and Federal Deposit Insurance Corp. . . . have
    disagreed with other government officials about banks' plans to repay
    government funds, and have privately complained that Treasury officials
    pushed them to allow banks to quickly leave TARP, according to people
    familiar with the matter'').
    ---------------------------------------------------------------------------
        There exists a range of views on how transparent Treasury
    should be as it seeks to divest from its stakes in financial
    institutions. Vincent Reinhart, a fellow at the American
    Enterprise Institute and a former official at the Federal
    Reserve, states that ``[b]y and large, government officials are
    big fans of constructive ambiguity.'' \217\ While it may be
    beneficial for the government to retain flexibility in certain
    situations, others disagree about the merits of a policy of
    constructive ambiguity. For example, James B. Thomson, vice
    president of the Office of Policy Analysis at the Federal
    Reserve Bank of Cleveland, has argued that a ``policy of
    supervisory transparency is superior to constructive
    ambiguity.'' \218\ This debate illustrates the inherent
    challenges and obstacles associated with the government's
    involvement in the private sector. In this regard, the
    government acknowledges that it does not function like an
    ordinary investor; however, its investments are purely
    taxpayer-funded. This means that the government has a
    heightened responsibility to the taxpayers whose money is being
    spent, and an even greater responsibility to be transparent and
    forthcoming about all aspects of its reasoning and decision-
    making.
    ---------------------------------------------------------------------------
        \217\ See Mark DeCambre, No Pity for Citi, New York Post (Sept. 4,
    2009) (online at www.nypost.com/p/news/business/
    no_pity_for_Citi_F7vQTwjTr4ogsVyyEQ4K6N). Henry Kissinger first
    employed this term in the context of diplomatic negotiations, and it
    has been used in economic policy to refer to a ``policy of using
    ambiguous statements to signal intent while retaining policy
    flexibility.'' See, e.g., Marvin Goodfriend and Jeffrey M. Lacker,
    Limited Commitment and Central Bank Lending, Economic Quarterly Federal
    Reserve Bank of Richmond, at 19-21 (Fall 1999) (hereinafter ``Limited
    Commitment and Central Bank'') (discussing the benefits and weaknesses
    of a policy of constructive ambiguity with regard to central bank
    lending).
        \218\ James B. Thompson, On Systemically Important Financial
    Institutions and Progressive Systemic Mitigation, Federal Reserve Bank
    of Cleveland, at 9 (2009) (online at clevelandfed.org/research/
    policydis/pdp27.pdf); see also Limited Commitment and Central Bank,
    supra note 217, at 19-21 (``Constructive ambiguity in the absence of an
    ability to precommit may actually increase the drift toward
    expansion''); see also International Monetary Fund, Global Economic
    Prospects and Principles for Policy Exit, at 7 (2009) (``Basic
    principles and plans for the exit and beyond should be established
    early and communicated clearly and consistently by policymakers to the
    public''). Similarly, two officials from the Federal Reserve Bank of
    Boston refer to ``less than constructive ambiguity.'' Jane Sneddon
    Little and Giovanni P. Olivei, Why the Interest in Reform?, Rethinking
    the International Monetary System, Proceedings from the Federal Reserve
    Bank of Boston Conference Series, at 81 (1999) (online at
    www.bos.frb.org/economic/conf/conf43/41p.pdf). In addition, Reinhart
    has expressed doubts about the benefits of constructive ambiguity,
    stating that ``[n]ow is the time to articulate an exit strategy.''
    Craig Torres and Scott Lanman, Bernanke May Explain Fed Exit Strategy
    in Testimony Next Week, Bloomberg (July 13, 2009) (online at
    www.bloomberg.com/apps/news?pid=20601087&sid=aNU.UkT9EB68).
    ---------------------------------------------------------------------------
        In its July report, the Panel examined the repurchase of
    stock warrants. At that time, 11 public financial institutions
    had repurchased their warrants from Treasury. The Panel's
    analysis of the numbers indicated that taxpayers had received
    only 66 percent of the Panel's best estimate of the value of
    the warrants.\219\ As the Panel stated then, ``[T]reasury
    should promptly provide written reports to the American
    taxpayers analyzing in sufficient detail the fair market value
    determinations for any warrants either repurchased by a TARP
    recipient from Treasury or sold by Treasury through an auction,
    and it should disclose the rationale for its choice of an
    auction or private sale.'' \220\ In order to ensure that
    taxpayers receive the maximum value as financial institutions
    exit the TARP, the Panel urged Treasury to make its process,
    reasoning, methodology, and exit strategy absolutely
    transparent.\221\
    ---------------------------------------------------------------------------
        \219\ See COP July Oversight Report, supra note 139, at 27.
        \220\ See COP July Oversight Report, supra note 139, at 44-45.
        \221\ The Panel's July report stated ``. . . it is critical that
    Treasury make the process--the reason for its decisions, the way it
    arrives at its figures, and the exit strategy from our future use of
    the TARP--absolutely transparent. If it fails to do so, the credibility
    of the decisions it makes and its stewardship of the TARP will be in
    jeopardy.'' COP July Oversight Report, supra note 139, at 4. Similarly,
    the Panel's November report echoed the same concerns regarding
    transparency by stating, ``. . . in light of these guarantees'
    extraordinary scale and their risk to taxpayers, the Panel believes
    that these programs should be subject to extraordinary transparency.
    The Panel urges Treasury to disclose greater detail about the rationale
    behind guarantee programs, the alternatives that may have been
    available and why they were not chosen, and whether these programs have
    achieved their objectives.'' See COP November Oversight Report, supra
    note 2, at 4. Lastly, Panel Chair Elizabeth Warren stated in her
    September testimony that ``[i]n order to ensure that taxpayers would
    receive the maximum value as banks exited TARP, the Panel urged
    Treasury to make its process, reasoning, methodology, and exit strategy
    absolutely transparent.'' See Senate Committee on Banking, Housing and
    Urban Affairs, Testimony of Elizabeth Warren, Emergency Economic
    Stabilization Act: One Year Later, 111th Cong., at 3 (Sept. 24, 2009)
    (online at cop.senate.gov/documents/testimony-092409-warren.pdf).
    ---------------------------------------------------------------------------
        Although there has not been the robust disclosure called
    for by the Panel, the return to taxpayers has increased since
    the July report was published. Subsequent to the publication of
    the July report, an additional 25 financial institutions have
    repurchased their warrants or sold warrants in auction sales,
    generating total aggregate proceeds to Treasury of $4.0
    billion, which represented more than 92 percent of the Panel's
    best estimate of their values.\222\ With specific regard to
    large TARP recipients, in December 2009, Treasury conducted
    auctions to sell its warrant positions in JPMorgan Chase,
    Capital One, and TCF Financial Corporation, and received
    approximately $1.1 billion in gross proceeds.\223\ Treasury
    stated that the auction sales were ``a robust alternative to
    negotiations'' since it received market price for the
    warrants.\224\ The Panel's analysis of the numbers indicated
    that the taxpayer received approximately 89 percent of the
    Panel's best estimate of the value of the warrants.\225\
    ---------------------------------------------------------------------------
        \222\ See TARP Transactions Report for Period Ending December 30,
    2009, supra note 166.
        \223\ Gross proceeds received for JPMorgan Chase, Capital One, and
    TCF Financial Corporation were approximately $950 million, $147
    million, and $9 million, respectively. See TARP Transactions Report for
    Period Ending December 30, 2009, supra note 166.
        \224\ Treasury conversations with Panel staff (Dec. 15, 2009).
        \225\ The valuation was derived by dividing total net proceeds
    received ($1.1 billion) by total aggregate value of Panel's best
    estimate ($1.3 billion). For the individual auction sales of JPMorgan
    Chase, Capital One, and TCF Financial Corporation, the taxpayers
    received 94 percent, 64 percent, and 81 percent, respectively, of the
    Panel's best estimate of the value of the warrants.
    ---------------------------------------------------------------------------
        As noted above, as the CPP program winds down, Treasury has
    indicated to Panel staff that it would consider all types of
    divestment alternatives, especially in regard to relatively
    small CPP investments in a large number of smaller
    institutions. At present, however, the focus is on an
    institution-by-institution approach.
        One form of exit from the TARP that has not drawn much
    attention from commentators involves those TARP-recipient
    financial institutions that fail, an event that can be expected
    to wipe out the taxpayers' investment. Ironically, when no
    further government intervention occurs, this kind of early and
    involuntary exit from TARP may have the effect of reducing
    moral hazard and restoring market discipline.

    5. Citigroup

                a. Acquisition of Assets and Current Value
        Between October 2008 and January 2009, Treasury invested a
    total of $50 billion in Citigroup through three separate
    programs: the CPP, the TIP, and the AGP.\226\ After Citigroup's
    repayment of trust preferred securities in December, Treasury
    currently holds 7.7 billion shares of Citigroup's common stock,
    worth $25.49 billion on December 31, 2009. Treasury is
    Citigroup's largest shareholder, with 27.04 percent of
    Citigroup's equity.
    ---------------------------------------------------------------------------
        \226\ The Panel notes that Treasury's Transaction Reports state
    that the total TARP assistance to Citigroup is $49 billion, based on
    the $25 billion CPP investment, $20 billion TIP investment, and
    Treasury's receipt of $4.03 billion in preferred stock under the AGP.
    While the total amount Treasury has invested under the AGP is $4.03
    billion, Treasury's actual maximum loss position under the AGP was $5
    billion, which is the number used by the Panel since that represents
    Treasury's actual exposure. For further information on the AGP
    accounting, see Figure 22, infra. The AGP agreement was structured so
    that losses on assets in the pool will be shared among Citigroup,
    Treasury, the FDIC and the Federal Reserve. As of September 30, 2009,
    the total asset pool was approximately $250.4 billion. U.S. Securities
    and Exchange Commission, Quarterly Report Pursuant to Section 13 or
    15(d) of the Securities Exchange Act of 1934 for Citigroup Inc., at 33-
    34 (Nov. 6, 2009) (online at www.sec.gov/Archives/edgar/data/831001/
    000104746909009754/a2195256z10-q.htm). Citigroup would absorb up to
    $39.5 billion of initial losses arising from the covered pool (losses
    of $8.1 billion had been recorded at September 30, 2009), and would
    then absorb 10 percent of any losses in excess of that amount. Id. The
    federal government would absorb the remainder, with Treasury absorbing
    the first $5 billion in federal liability, the FDIC absorbing the
    second $10 billion, and the Federal Reserve covering any further
    federal liability by way of a non-recourse loan to Citigroup. Id. The
    guarantee was structured to run for up to 10 years for residential
    assets and five years for non-residential assets. Id.
    ---------------------------------------------------------------------------
        The first Citigroup investment was made through the CPP. On
    October 28, 2008, Treasury used the program to inject $25
    billion into Citigroup. Treasury received $25 billion face
    value of CPP Preferred and warrants to purchase 210,084,034
    shares at a strike price of $17.85. The second TARP investment
    in Citigroup was made through the TIP. Although Citigroup's TIP
    capital infusion was announced on November 23, 2008 and
    finalized on December 31, 2008, the guidelines for the TIP were
    not announced until January 2, 2009.\227\ Under the TIP,
    Treasury purchased $20 billion in preferred stock from
    Citigroup.\228\ This preferred stock paid dividends of 8
    percent. Treasury also took warrants to accompany the preferred
    stock. There are no standard terms for the TIP; terms and
    conditions were determined on a case-by-case basis.\229\ Any
    institutions participating in the TIP were required to comply
    with strict executive compensation standards.
    ---------------------------------------------------------------------------
        \227\ See U.S. Department of the Treasury, Treasury Releases
    Guidelines for Targeted Investment Program (Jan. 2, 2009) (online at
    treasury.gov/press/releases/hp1338.htm) (hereinafter ``Treasury
    Releases Guidelines for Targeted Investment Program''); Joint Statement
    on Citigroup, supra note 110.
        \228\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166; Citigroup, Citi Issuance of $20 Billion Perpetual
    Preferred Stock and Warrants to U.S. Treasury As Part of TARP Program
    (Dec. 31, 2008) (online at www.citigroup.com/citi/fin/data/
    fs081231a.pdf).
        \229\ Treasury Releases Guidelines for Targeted Investment Program,
    supra note 227.
    ---------------------------------------------------------------------------
        Under the AGP, Treasury, the FDIC, and the Federal Reserve
    guaranteed, until the program was ended, approximately $250.4
    billion of Citigroup's assets.\230\ The guarantee, originally
    for $301 billion, followed a continuing deterioration of
    Citigroup's financial status after it received CPP funds. As
    consideration for the guarantee, Citigroup issued Treasury with
    $4.034 billion face value of preferred stock (the AGP
    Preferred) \231\ and warrants to purchase 66,531,728 shares of
    common stock at a strike price of $10.61.\232\
    ---------------------------------------------------------------------------
        \230\ According to Citigroup's SEC filing for the third quarter of
    2009, the total asset pool had declined by approximately $50 billion on
    a GAAP basis to approximately $250.4 billion as of September 30, 2009.
    See Citigroup Third Quarter 10-Q, supra note 56, at 33. COP November
    Oversight Report, supra note 2 (describing the Citigroup and Bank of
    America guarantees). From the beginning, Treasury had stated that AGP
    assistance would not be ``widely available.'' U.S. Department of the
    Treasury, Report to Congress Pursuant to Section 102 of the Emergency
    Economic Stabilization Act, at 1 (Dec. 31, 2008) (online at
    www.financialstability.gov/docs/AGP/sec102ReportToCongress.pdf).
        \231\ The FDIC was issued $3.025 billion in preferred stock.
    Treasury and the FDIC's holding were exchanged for separate trust
    preferred securities with a coupon of 8 percent in the subsequent
    exchange offer.
        \232\ The AGP Preferred have a perpetual life and pay dividends at
    8 percent per annum. They can be redeemed in stock or cash, as mutually
    agreed between Treasury and Citigroup, otherwise the redemption terms
    of CPP preferred terms apply. Citigroup is not permitted to pay common
    stock dividends, in excess of $0.01 per share per quarter, for a period
    of three years without Treasury consent. With respect to repurchase
    rights, the same terms apply as for the CPP Preferred, meaning they
    could be sold in private transactions to interested investors, or that
    they could be offered to the public in a resale registered with the
    SEC. Master Agreement Among Citigroup Inc., Certain Affiliates of
    Citigroup Inc. Identified Herein, Department of the Treasury, Federal
    Deposit Insurance Corporation and Federal Reserve Bank of New York
    (Jan. 15, 2009) (online at www.financialstability.gov/docs/AGP/
    Citigroup_01152009.pdf).
    ---------------------------------------------------------------------------
        On July 30, 2009, Treasury and Citigroup agreed to exchange
    Treasury's $25 billion in CPP Preferred for 7.7 billion shares
    of common stock priced at $3.25 per share. The two parties also
    agreed to exchange Treasury's $20 billion in TIP holdings and
    $4 billion of preferred stock acquired under the AGP into trust
    preferred securities.\233\ These exchanges took place as part
    of a larger $58 billion exchange offer with public and private
    holders of Citigroup's debt in which Citigroup bolstered its
    common tangible equity and thus its reserves. The company
    received shareholder approval for the exchange on September 3,
    2009.\234\
    ---------------------------------------------------------------------------
        \233\ The trust preferred securities are senior in right of
    repayment to preferred stock. They pay dividends at 8 percent per
    annum, and are paid on a quarterly basis. The term is for 30 years.
    Treasury may, subject to applicable securities laws, transfer, sell,
    assign, or otherwise dispose of its trust preferred shares provided
    that it consults with Citigroup for the first three years to see if
    such action is feasible. Upon regulatory approval, Citigroup has the
    right to redeem such shares, either at its discretion or upon the
    occurrence of specified events, but cannot redeem less than all of the
    outstanding securities unless all accumulated and unpaid dividends have
    been paid. In certain circumstances, these securities carry limited
    voting rights. These securities are also ranked equally, meaning
    payment thereon shall be made pro rata with the common securities,
    except in the case of default. Exchange Agreement dated June 9, 2009
    between Citigroup Inc. and United States Department of the Treasury, at
    Schedule A (June 9, 2009) (online at www.financialstability.gov/docs/
    agreements/08282009/Citigroup%20Exchange%20Agreement.pdf).
        \234\ Citigroup, Citi Announces Shareholder Approval of Increase in
    Authorized Common Shares, Paving Way to Complete Share Exchange (Sept.
    3, 2009) (online at www.citibank.com/citi/press/2009/090903a.htm).
    ---------------------------------------------------------------------------
        On December 14, 2009, Citigroup, Treasury, and the
    regulators announced an agreement regarding Citigroup's plan to
    repay part of its outstanding TARP assistance.\235\ Pursuant to
    the agreement, Citigroup would repay Treasury the $20 billion
    it held in trust preferred securities and terminate its loss-
    sharing agreement under the AGP, meaning that the government
    would no longer be liable for any losses arising from the
    covered asset pool.\236\ To fund this repayment, Citigroup
    successfully completed a securities offering of $21.08 billion
    of equity securities, comprising $17 billion of common stock
    (with an additional over-allotment option of 184.9 million
    shares exercised on December 23, 2009) \237\ and $3.5 billion
    of tangible equity units.\238\ On December 23, 2009, Citigroup
    completed its TARP repayment and terminated its loss-sharing
    agreement after Treasury permitted it to cancel $1.8 billion of
    the $7 billion in AGP Preferred that Citigroup had issued to
    Treasury and the FDIC as consideration.\239\ Following
    Citigroup's repayment of the $20 billion of trust preferred
    securities and the termination of the loss-sharing agreement,
    Citigroup is no longer deemed a beneficiary of ``exceptional
    financial assistance'' under the TARP (even though some AGP
    Preferred is still outstanding), meaning that it will no longer
    be subject to the jurisdiction of Special Master for
    Compensation Kenneth Feinberg.\240\
    ---------------------------------------------------------------------------
        \235\ Treasury conversations with Panel staff (Dec. 15, 2009); see
    also Citigroup, Repaying TARP and Other Capital Actions (Dec. 14, 2009)
    (online at www.sec.gov/Archives/edgar/data/831001/000095012309070371/
    x80976bfwp.htm) (hereinafter ``Repaying TARP and Other Capital
    Actions''); U.S. Department of the Treasury, Treasury Statement
    Regarding Citigroup's Intention to Repay Taxpayers (Dec. 14, 2009)
    (online at www.financialstability.gov/latest/pr_12142009.html)
    (hereinafter ``Treasury Statement Regarding Citigroup's Intention to
    Repay Taxpayers''). As part of the agreement, Citigroup also decided to
    issue $1.7 billion of common stock equivalents to its employees in
    January 2010 as a substitution for the cash they would have otherwise
    received. Subject to shareholder approval at the company's annual
    meeting on April 1, 2010, the common stock equivalents will be replaced
    by common stock.
        \236\ Citigroup has used the proceeds from its offerings to repay
    Treasury's TIP investments (the preferred securities exchanged for
    trust preferred securities in July 2009). Trust preferred securities
    possess characteristics of both equity and debt issues. These
    securities are generally long-term, allow early redemption by the
    issuer, make periodic fixed or variable interest payments, and mature
    at face value. When issued by a bank holding company such as Citigroup,
    trust preferred securities are treated as capital rather than as debt
    for regulatory purposes.
        \237\ An over-allotment option is granting the underwriter in a
    public offering with the option, for a period of anywhere from 15 to 45
    days after the offering date, to purchase additional securities from
    the issuer (usually up to 15 percent of the shares being sold) at the
    initial price to the public, in order to cover over-subscriptions for
    the securities.
        \238\ Repaying TARP and Other Capital Actions, supra note 235;
    Citigroup, Forms 424(b) (Dec. 16, 2009) (online at www.sec.gov/
    Archives/edgar/data/831001/000095012309071618/y80953b2e424b2.htm and
    www.sec.gov/Archives/edgar/data/831001/000095012309071909/
    y81064e424b2.htm) (SEC filings detailing the issuances of securities by
    Citigroup in connection with the TARP repayment); Treasury
    conversations with Panel staff (Dec. 15, 2009).
        \239\ Treasury conversations with Panel staff (Dec. 15, 2009);
    Treasury conversations with Panel staff (Jan. 7, 2010); Allison
    Testimony before House Oversight and Government Reform Committee, supra
    note 118, at 11; Citigroup, Citi Completes $20 Billion TARP Repayment,
    Terminates Loss-Sharing Agreement (Dec. 23, 2009) (online at
    www.citigroup.com/citi/press/2009/091223b.htm). In discussions with
    Panel staff, Treasury staff indicated that the $5.259 billion in trust
    preferred securities that will be retained reflects a $1.8 billion
    reduction since the loss-sharing agreement was terminated after one
    year. Treasury will incur the $1.8 billion haircut initially, but will
    receive up to $800 million of the Citigroup trust preferred securities
    currently held by the FDIC, provided that Citigroup repays its
    outstanding debt issued under the FDIC's Temporary Liquidity Guarantee
    Program (TLGP).
        \240\ Treasury conversations with Panel staff (Dec. 15, 2009);
    Treasury conversations with Panel staff (Jan. 7, 2010). Although
    Citigroup is no longer considered a participant in the CPP due to the
    exchange of CPP preferred securities for common stock, Treasury has
    specifically stated that Citigroup will remain subject to EESA's
    general corporate governance standards and executive compensation
    restrictions, as amended by the American Recovery and Reinvestment Act
    of 2009. This is because Treasury, when agreeing to the exchange, did
    not want to surrender the leverage and taxpayer protections that these
    restrictions afford. In addition, Citigroup has agreed to abide by Mr.
    Feinberg's 2009 executive compensation determinations for its 100 most
    highly compensated employees.

    FIGURE 3: INCOME FROM CITIGROUP TARP INVESTMENTS AS OF NOVEMBER 30, 2009
                                      \241\
    ------------------------------------------------------------------------
                        Program                          Dividends Earned
    ------------------------------------------------------------------------
    CPP............................................          $932,291,666.67
    AGP............................................           255,486,666.66
    TIP............................................         1,333,333,333.33
                                                    ------------------------
        Total......................................       $2,521,111,666.66
    ------------------------------------------------------------------------
    \241\ U.S. Department of the Treasury, Cumulative Dividends Report as of
      November 30, 2009 (Dec. 18, 2009) (online at
      www.financialstability.gov/docs/dividends-interest-reports/
      November%202009%20Dividends%20and%20Interest%20Report.pdf)
      (hereinafter ``Cumulative Dividends Report as of November 30, 2009'').

        The following table shows Treasury's holdings in Citigroup
    as of December 31, 2009:

                                                FIGURE 4: TREASURY HOLDINGS IN CITIGROUP AS OF DECEMBER 31, 2009
                                                                      [Dollars in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         Estimated Valuation as of 12/31/09
                                                                                                            Revenues  --------------------------------------
                      Asset                               Number                   Acquisition Cost        Generated       Low          High         Best
                                                                                                                         Estimate     Estimate     Estimate
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Preferred Stock (CPP)....................  0...........................  $25,000....................         $932  ...........  ...........          N/A
    Preferred Stock (TIP)....................  0...........................  $20,000....................          933  ...........  ...........          N/A
    Preferred Stock (AGP)....................  0...........................  $5,000 \242\...............          175  ...........  ...........          N/A
    Common Stock (CPP).......................  7,692,307,692...............  $25,000....................            0  ...........  ...........      $25,462
    Trust Preferred..........................  Received in exchange for AGP  $2,234.....................    \243\ 737  ...........  ...........        1,871
                                                Preferred.
    Warrants (CPP, TIP, AGP).................  210,084,024 shares at $17.85  (Received as part of CPP     ...........          $10         $891          204
                                                (CPP).                        Preferred, TIP.
                                               188,501,414 at $10.61 (TIP).  Preferred and AGP).........
                                               66,531,728 at $10.61 (AGP)..  ...........................  ...........  ...........  ...........  ...........  Total..................................  ............................  ...........................  ...........  ...........  ...........     $27,537
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \242\ Treasury's potential maximum loss position under the AGP was $5 billion; Treasury received $4,034 billion in preferred stock under the AGP.
    \243\ Of the total Trust Preferred revenues generated, $636 million relates to dividends received from TIP Trust Preferred securities.

                b. Disposal of Assets and Recovery of Expended Amounts
        As shown in Figure 4 above, Treasury owns trust preferred
    securities, common stock, and warrants for common stock in
    Citigroup. The taxpayers' money can be recovered from the trust
    preferred securities so long as Citigroup generates profits
    sufficient to make dividend payments on them and eventually
    redeem them. Alternatively, the trust preferred securities
    could be sold into the markets. Recovery of the taxpayers'
    investment in the common stock and warrants depends on the
    performance of the common stock, which in turn depends on
    Citigroup's actual performance and the market's perception of
    its likely performance in the future. Treasury may sell its
    common stock holdings publicly or privately. Since Citigroup
    has repaid its trust preferred securities, it may also
    repurchase its warrants issued under the TIP.\244\ The
    repurchase must happen at ``fair market value.'' \245\ As
    discussed above, fair market value would be determined using a
    negotiation and appraisal process between Treasury and
    Citigroup. If Citigroup chooses not to repurchase its warrants,
    or if an agreement cannot be reached on a fair price and
    neither party wishes to invoke the appraisal procedure,
    Treasury will auction the warrants to the public. Unlike other
    auctions that have occurred relatively shortly after the TARP
    recipient has repaid its TARP funds, Treasury has indicated
    that, if Citigroup's warrants were to be auctioned to the
    public, the auction would not take place in the near
    future.\246\ This is due to an agreement by Treasury to refrain
    from selling its common stock holdings until March 16, 2010, as
    well as the size of those holdings.\247\
    ---------------------------------------------------------------------------
        \244\ See Securities Purchase Agreement dated December 31, 2008
    between Citigroup Inc., as Issuer and United States Department of the
    Treasury, at 4.9(a).
        \245\ Id.
        \246\ Treasury conversations with Panel staff (Jan. 7, 2010).
        \247\ Treasury conversations with Panel staff (Jan. 7, 2010).
    ---------------------------------------------------------------------------

         FIGURE 5: VALUE OF CITIGROUP'S STOCK SINCE OCTOBER 2008 \248\

    ---------------------------------------------------------------------------
        \248\ SNL Financial, Citigroup Inc. Historical Stock Price (online
    at www.snl.com/InteractiveX/
    historyCP.aspx?ID=4041896&Tabular=True&GraphType=3&Frequency=
    0&TimePeriod2=9&BeginDate=1%2F13%2F2009&EndDate=
    1%2F13%2F2010&ctl00%24ctl11%24IndexPreference=
    default&ComparisonIndex2=25&ComparisonYield2=-
    1&CustomIndex=0&ComparisonTicker2=&Action=Apply).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Figure 5 above reflects the decline of and volatility in
    Citigroup's stock price since October 3, 2008, the date that
    President Bush signed EESA into law. Throughout most of the
    period it has received TARP assistance, Citigroup's stock price
    has been trading at approximately $4 per share, and it
    plummeted to around $1 per share in March 2009. Government
    intervention in the private sector has significantly influenced
    both Citigroup's credit ratings and stock price.\249\
    ---------------------------------------------------------------------------
        \249\ For further discussion on how government intervention impacts
    credit ratings and equity pricing, see Section B.5, infra.
    ---------------------------------------------------------------------------
    The Panel notes that the government assistance has boosted
    Citigroup's credit ratings,\250\ and that although it is dif-
    ficult to analyze Citigroup's stock price, that price has been
    significantly affected by the extraordinary government
    intervention.
    ---------------------------------------------------------------------------
        \250\ Credit ratings tend to be higher than they would otherwise
    be, since government support provides the public and stockholders an
    added degree of confidence in the company's health. For example, in its
    July 31, 2009 report, Standard & Poor's gave Citigroup a credit rating
    of ``A'' but noted ``the potential for additional extraordinary
    government support, if necessary,'' and further stated that Citigroup's
    rating ``reflects a four-notch uplift from our assessment of
    Citigroup's stand-alone credit profile'' (emphasis added). See also
    Fitch Ratings, Citigroup Inc. (Nov. 2, 2009) (hereinafter ``Fitch
    Ratings for Citigroup''); Moody's Investors Service, Global Credit
    Research, Issuer Comment: Citigroup: Earnings Commentary--Third Quarter
    2009 (Oct. 16, 2009) (hereinafter ``Moody's Earnings Commentary for
    Citigroup'').
    ---------------------------------------------------------------------------
        Pro-rating the original $25 billion ``acquisition cost'' of
    Citigroup shares under the CPP against the number of shares
    received in the exchange (ignoring shares already sold and
    warrants), Citigroup shares need to be worth approximately
    $3.25 for Treasury to ``break even.'' In Citigroup's December
    offering, Treasury agreed initially to sell up to $5 billion of
    its shares in a concurrent secondary offering, while announcing
    plans to sell the remainder of its shares over the next six to
    twelve months.\251\ Although Citigroup managed to raise over
    $21 billion in the capital markets on December 16, 2009 (the
    largest equity offering in the U.S. equity markets), it priced
    the new shares at $3.15 each, below Treasury's break-even
    price.\252\ Rather than incur a $770 million loss, Treasury
    decided not to participate in the secondary offering and
    postponed plans to start divesting its common shares.\253\
    Treasury has now agreed not to sell its common stock until
    after March 16, 2010 and plans to sell the remainder of its
    holdings over the next 12 months.\254\ Until it does so,
    Treasury will remain the major shareholder.\255\ Because
    Treasury's sales of its holdings in Citigroup common stock
    would constitute a change in ownership, that sale would not be
    feasible without the recent IRS guidance that allows Treasury
    to conduct the sales and Citigroup to maintain its deferred tax
    assets, discussed above in Section B.6.\256\
    ---------------------------------------------------------------------------
        \251\ Treasury Statement Regarding Citigroup's Intention to Repay
    Taxpayers, supra note 235.
        \252\ As noted above, Citigroup's offering was the largest offering
    in American history. Even before its offering occurred, Citigroup faced
    a number of factors that impacted its market pricing. These included
    its size, its occurrence at year-end with resulting time constraints,
    its timing after several similar types of transactions, including the
    Bank of America and Wells Fargo offerings to facilitate their TARP
    repayments (and the limited demand for financial stocks as a result),
    and eagerness on the part of Citigroup's management to repay the TARP
    funds to get out from under the government's thumb. See Kevin Dobbs,
    Conditions improving, but Citi still faces confidence crisis, SNL
    Financial (Jan. 7, 2010) (hereinafter ``Conditions improving, but Citi
    still faces confidence crisis'') (suggesting that Citigroup's pricing
    of the deal at 20 percent below its announced target was due in part to
    ``poor timing'').
        \253\ This decision underscores Treasury's commitment to
    ``protect[ing] the taxpayers' investment.'' Allison Testimony before
    House Oversight and Government Reform Committee, supra note 118.
        \254\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118. As part of Treasury's agreement to
    delay selling its common stock holdings for 90 days, Citigroup agreed
    to compensate Treasury for all of the costs associated with its future
    common stock sales, including commissions.
        \255\ While Treasury remains the major shareholder, Treasury does
    not have any Citigroup board seats. The Shareholders Agreement between
    Treasury and Citigroup stipulates that Treasury will exercise its right
    to vote only on particular matters (e.g., the election or removal of
    directors, major corporate transactions including mergers, dissolution,
    amendments to charter or bylaws). On other issues, Treasury ``will vote
    its shares in the same proportion'' as all other company shares are
    voted. Allison Testimony before House Oversight and Government Reform
    Committee, supra note 118.
        \256\ For further discussion on the recent IRS guidance and its tax
    impact, see discussion in Section B.6.
    ---------------------------------------------------------------------------
        On December 31, 2009, Citigroup's stock price was $3.31 a
    share, meaning that the value of Treasury's remaining holdings
    in Citigroup common stock was $25.49 billion, and the value of
    the warrants held, by the Panel's best estimate, was $204.32
    million. By that measure, Citigroup stock would need to be
    worth approximately $3.25 a share for the TARP investment in
    common stock to be repaid. The warrants derive from three
    separate investments in Citigroup, and in each case were part
    of a package of securities issued to Treasury, so it is
    difficult to attribute an ``acquisition cost'' to specific
    components such as the warrants.\257\ As part of the
    consideration for Treasury's TARP investment, the warrants are
    supposed to permit the taxpayers to benefit from the ``upside''
    deriving from the government's intervention.\258\
    ---------------------------------------------------------------------------
        \257\ Citigroup financial statements distinguish between preferred
    and warrants. However, when the initial investments were made there
    were part of a package of securities.
        \258\ As the Panel noted in its February Oversight Report, ``[t]he
    warrants allowed the Treasury to buy common stock of each institution
    for an additional amount--called the ``exercise price''--that was
    calculated so that Treasury benefit [sic] if the value of the common
    stock increased.'' Congressional Oversight Panel, February Oversight
    Report: Valuing Treasury's Acquisitions, at 5 (Feb. 6, 2009) (online at
    cop.senate.gov/documents/cop-020609-report.pdf).
    ---------------------------------------------------------------------------
        In conversations with Panel staff, Treasury indicated that
    it has spent much time thinking about how to make an orderly
    exit from Citigroup, and emphasized that there are many
    different possibilities for how to sequence the sales of its
    common stock holdings.\259\ According to Assistant Secretary
    Allison, Treasury concluded that ``by gradually selling the
    shares, [it] will be in a better position to achieve the best
    possible prices for the American public.'' \260\
    ---------------------------------------------------------------------------
        \259\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \260\ Allison Testimony Transcript, supra note 135.
    ---------------------------------------------------------------------------
        With respect to Citigroup's plans and strategies for future
    profitability, in the first quarter of 2009, Citigroup
    reorganized itself into Citicorp and Citi Holdings, the former
    consisting of operations considered central to the bank's
    future, including worldwide retail banking, investment banking,
    and transaction services for institutional clients, and the
    latter holding the assets and business units that Citigroup
    does not regard as its core business, such as asset management
    and consumer lending, and which it will presumably sell
    off.\261\ Citigroup has already made some material asset sales,
    including brokerage and asset management business units, as set
    out in Figure 6 below. Due in part to the current difficulties
    in obtaining what it considers to be reasonable prices, some of
    these sales have been made at low prices.\262\ It remains
    unclear whether Citigroup's primary impetus for these sales was
    to strengthen its capital base and reduce risk by concentrating
    on core business areas and simplifying the institution, or to
    reduce government involvement with its business. As a result of
    these changes, as well as reductions in headcount and expenses
    since the beginning of 2008, Citigroup stated it has raised
    ``considerable capital'' and has built ``considerable
    liquidity.'' \263\
    ---------------------------------------------------------------------------
        \261\ Citigroup conversations with Panel staff (Dec. 4, 2009); see
    Bank of America--Merrill Lynch Financial Services Conference,
    Presentation by Citigroup Vice Chairman Ned Kelly, at 1 (Nov. 11, 2009)
    (online at www.citigroup.com/citi/fin/data/p091111a.pdf?ieNocache=311)
    (hereinafter ``Citigroup Ned Kelly Presentation''); Citi Statement to
    the Congressional Oversight Panel on Asset Sales and Business
    Divestitures (Dec. 22, 2009) (hereinafter ``Citi Statement on Asset
    Sales and Business Divestitures'').
        \262\ See Figure 6 and related footnotes identifying the amounts
    Citigroup has realized on its asset sales as compared to Citigroup's
    prior valuations of those assets.
        \263\ Citigroup conversations with Panel staff (Dec. 4, 2009).

                      FIGURE 6: CITIGROUP ASSET SALES \264\
    ------------------------------------------------------------------------
               Asset Sold                Date of Sale       Amount Realized
    ------------------------------------------------------------------------
    German Retail Banking Operation.   12/5/2008........  $6.6 billion \265\
    Citigroup Global Services          12/31/2008.......  $512 million \266\
     Limited.
    Citigroup Technology Services     1/20/2009.........  $127 million \267\
     Ltd.
    Smith Barney....................   6/1/2009.........  $2.75 billion
                                                           \268\
    Three North American Partner      8/31/2009.........  Undisclosed \269\
     Credit Card Portfolios.
    Nikko Cordial Securities Inc....  10/1/2009.........  $8.7 billion \270\
    Nikko Citi Trust and Banking      10/1/2009.........  $212 million \271\
     Corporation.
    Nikko Asset Management..........   10/1/2009........  $844 million \272\
    Portugal Credit Cards Business..  11/30/2009........  Undisclosed \273\
    Norwegian Consumer Finance         12/15/2009.......  Undisclosed \274\
     Business.
    Phibro LLC......................  12/31/2009........  $250 million
                                                           \275\
    Diners Club North America \276\.  12/31/2009........  Undisclosed \277\
    Primerica, Inc..................  Not closed          TBD \278\
                                       (announced 11/5/
                                       2009).
    ------------------------------------------------------------------------
    \264\ Citigroup had divested $281 billion in ``non-core businesses and
      assets'' from its Citi Holdings subsidiary at the end of Q3 2009.
      Citigroup, Repaying TARP and Other Capital Actions, at 13 (Dec. 14,
      2009) (online at www.citibank.com/citi/fin/data/p091214a.pdf).
      Citigroup divested a further $25 billion in assets during Q4 2009. Id.
      This table only includes publicly disclosed transactions; other non-
      public transactions have taken place which, although not reflected in
      this table, are reflected in the $306 billion total. Citi Statement on
      Asset Sales and Business Divestitures, supra note 261.
    \265\ Citigroup, Citi Successfully Completes Sale of German Retail
      Banking Operation to Credit Mutuel-CIC (Dec. 5, 2008) (online at
      www.citi.com/citi/press/2008/081205a.htm). Citigroup previously valued
      the assets at $15.6 billion, meaning that the sale took place at
      almost a 50 percent discount. See id.
    \266\ Citigroup, Citi Completes Sale of Citigroup Global Services
      Limited (Dec. 31, 2008) (online at www.citi.com/citi/press/2008/
      081231a.htm).
    \267\ Citigroup, Form 10-Q for the Quarterly Period Ending March 31,
      2009, at 10 (Mar. 31, 2009) (online at www.citigroup.com/citi/fin/data/
      q0901c.pdf?ieNocache=664); Citigroup, Citi Completes Sale of Citigroup
      Technology Services Ltd. (India) (Jan. 20, 2009) (online at
      www.citi.com/citi/press/2009/090120e.htm).
    \268\ Citigroup sold 100 percent of its Smith Barney, Quilter and
      Australia private client networks in exchange for a 49 percent stake
      in a joint venture with Morgan Stanley and an upfront cash payment of
      $2.75 billion. Citigroup, Form 10-Q for the Quarterly Period Ending
      June 30, 2009, at 14 (June 30, 2009) (online at www.citi.com/citi/fin/
      data/q0902c.pdf?ieNocache=410). CEO Vikram Pandit has publicly
      indicated that Citigroup will eventually sell its stake in the joint
      venture. Matthias Rieker, Citi Plans to Shed Stake in Smith Barney,
      Wall Street Journal (Sept. 17, 2009) (online at online.wsj.com/article/
      SB125312761700516895.html).
    \269\ Citigroup, Citi Holdings Update: Citi Sells Three Credit Card
      Portfolios (Aug. 31, 2009) (online at www.citi.com/citi/press/2009/
      090831d.htm). Although Citigroup has not disclosed the terms of the
      sale, it previously valued the assets it sold at $1.3 billion. Id.
    \270\ Citigroup, Form 10-Q for the Quarterly Period Ending September 30,
      2009, at 99 (Sept. 30, 2009) (online at www.citigroup.com/citi/fin/
      data/q0903c.pdf?ieNocache=909). Citigroup previously valued these
      assets at $23.6 billion. Id. at 11. Contemporaneous press reports
      indicate that robust bidding among major Japanese financial
      institutions took place for the right to acquire Nikko Cordial. Alison
      Tudor, Citi's Nikko Sale Ignites Japanese Bid War, Wall Street Journal
      (Apr. 2, 2009) (online at online.wsj.com/article/
      SB123863295192980917.html).
    \271\ Citigroup, Citi Successfully Completes Sale of NikkoCiti Trust and
      Banking Corporation to Nomura Trust and Banking (Oct. 1, 2009) (online
      at www.citi.com/citi/press/2009/091001b.htm).
    \272\ Citigroup, Citi Successfully Completes Sale of Nikko Asset
      Management to Sumitomo Trust (Oct. 1, 2009) (online at www.citi.com/
      citi/press/2009/091001a.htm).
    \273\ Citigroup, Citi to Sell Portugal Credit Cards Business to Barclays
      Bank PLC (Sept. 29, 2009) (online at www.citi.com/citi/press/2009/
      090929b.htm). Although Citigroup has not disclosed the terms of the
      sale, it previously valued the assets at =644 million, about $938
      million. See id.
    \274\ Citigroup, Citi to Sell Norwegian Consumer Finance Business to
      Gjensidige Bank ASA (Oct. 8, 2009) (online at www.citi.com/citi/press/
      2009/091008a.htm). Although Citigroup has not disclosed the terms of
      the sale, it previously valued the assets it sold at $470 million. Id.\275\ Citigroup announced that it would sell Phibro LLC for a purchase
      price equal to the net asset value of the business. Citigroup, Citi to
      Sell Phibro, LLC (Oct. 9, 2009) (online at www.citi.com/citi/press/
      2009/091009a.htm). Occidental announced that it anticipated the net
      asset value of Phibro would be about $250 million when the deal
      closed. Occidental Petroleum, Occidental Petroleum Announces
      Acquisition of Phibro (Oct. 9, 2009) (online at newsroom.oxy.com/
      portal/site/oxy/
      ?ndmViewId=news_view&newsId=20091026006112&newsLang=en). Citing
      government pressure to sell the energy-trading business, news reports
      characterized the sale price as ``bargain-basement.'' David Enrich,
      Ben Casselman and Deborah Solomon, How Occidental Scored Citi Unit
      Cheaply, Wall Street Journal (Oct. 12, 2009) (online at online.wsj.com/
      article/SB125509326073375979.html).
    \276\ Citigroup, Citi Sells Diners Club North America Business (Nov. 24,
      2009) (online at www.citibank.com/citi/press/2009/091124a.htm)
      (hereinafter ``Citi Sells Diners Club North America Business'').
    \277\ Citi Sells Diners Club North America Business, supra note 276.
      Although Citigroup has not disclosed the terms of the sale, it
      previously valued the assets involved at $1 billion.
    \278\ Primerica, Inc. has filed the paperwork to conduct an initial
      public offering, with proceeds going to Citigroup, as part of a
      reorganization and eventual divestiture by Citigroup. U.S. Securities
      and Exchange Commission, Form S-1 Registration Statement: Primerica,
      Inc., at 1, 6-7, 39 (Nov. 5, 2009) (online at www.sec.gov/Archives/
      edgar/data/1475922/000119312509225601/ds1.htm). Citigroup attempted to
      sell Primerica to another financial institution or other investor but
      could not find a buyer. David Enrich, An IPO of Primerica Will End a
      Citi Era, Wall Street Journal (Nov. 6, 2009) (online at online.wsj.com/
      article/SB125746499148732279.html). The IPO has not yet taken place;
      Primerica held $12.1 billion in assets as of June 30, 2009. U.S.
      Securities and Exchange Commission, Form S-1 Registration Statement:
      Primerica, Inc., at 11 (Nov. 5, 2009) (online at www.sec.gov/Archives/
      edgar/data/1475922/000119312509225601/ds1.htm).

                c. Analysis of Intended Exit Strategy
        Given the recent announcement by Citigroup concerning its
    TARP repayment, the Panel notes that Treasury is left with 7.7
    billion common shares, which it is free to sell at any time
    after the 90-day lockup period which expires on March 16, 2010,
    and $2.23 billion of trust preferred securities issued
    originally under the AGP.\279\ Given the regulators' decision
    to allow Citigroup to repay, there are only a few remaining
    prospective issues with respect to Treasury's exit strategy.
    This discussion focuses on those remaining challenges.
    ---------------------------------------------------------------------------
        \279\ For further discussion of the AGP termination and the related
    effect on the government's holding of trust preferred securities, see
    supra note 239.
    ---------------------------------------------------------------------------
        In making the decision to sell the 7.7 billion common
    shares that it holds in Citigroup, Treasury will need to
    balance the desire to exit ``as soon as practicable'' \280\
    with the need to maximize the return (or minimize the loss) to
    the American taxpayers and maintain institutional and systemic
    stability, as identified by EESA.\281\ There are strong
    arguments from a pure investment perspective for Treasury to
    hold its investments as long as possible, with the expectation
    that equity values will increase and taxpayers will see a
    greater return. The Panel notes that Treasury opted recently to
    postpone divesting its common shares in order to avoid
    incurring a $770 million loss. Instead, as discussed above,
    Treasury anticipates disposing of its remaining common stock
    holdings during the next 12 months. At the current market
    price, Treasury's common shares are worth about $27.6
    billion.\282\ Because the common shares were converted from $25
    billion of preferred shares, that is a gain of more than $2
    billion, or 10.4 percent, on paper. Even if Treasury sells now
    at a profit, there remains the possibility that it could be
    second-guessed if the shares were to increase in value at a
    later date. In conversations with Panel staff, however,
    Treasury staff emphasized that Treasury is a ``reluctant
    shareholder'' and that the TARP was not designed primarily to
    make money.\283\ Treasury is not trying to pick trading spots,
    meaning that its actions are not driven purely by a desire to
    maximize shareholder value.\284\ Due to its desire to preserve
    the stability of individual institutions, however, Treasury is
    unlikely to sell its stakes all at once since that would likely
    depress the share price. As of December 9, 2009, Citigroup's
    trading volume was averaging 471 million shares per day, or
    about 6 percent of Treasury's holdings. The challenge,
    therefore, is to dispose of its stakes in an orderly but
    deliberate fashion. Treasury's interests in preserving
    institutional stability are also illustrated by its agreement
    to a 90-day lockup period. There has been some speculation that
    Treasury only agreed to this after Citigroup notified Treasury
    of its challenges in attracting investors, some of whom
    indicated they would only buy shares if Treasury agreed to such
    a restriction.\285\ The Panel notes that Treasury previously
    had the capacity to sell its Citigroup common shares at its
    discretion. By agreeing to the 90-day lockup period, Treasury
    may have limited for a time its ability to sell when
    circumstances might be more favorable. On balance, Treasury's
    actions suggest the tensions and competing interests that exist
    in its three-pillared management strategy. While it is
    difficult to determine which if any pillar has been the primary
    driving force behind Treasury's decision-making with respect to
    the disposition of its Citigroup common stock holdings,
    Treasury's strategy of intending to balance taxpayer return,
    institutional stability and systemic stability, tips in favor
    of institutional and systemic stability, which are now very
    much the same.
    ---------------------------------------------------------------------------
        \280\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 5.
        \281\ See 12 U.S.C. Sec. 5213.
        \282\ This figure reflects Citigroup stock's closing price as of
    Friday, January 8, 2010.
        \283\ Treasury conversations with Panel staff (Dec. 15, 2009);
    Allison Testimony before House Oversight and Government Reform
    Committee, supra note 118, at 5 (stating that ``the U.S. government is
    a shareholder reluctantly and out of necessity. We intend to dispose of
    our interests as soon as practicable, with the dual goals of achieving
    financial stability and protecting the interests of the taxpayers'').
        \284\ Treasury conversations with Panel staff (Dec. 15, 2009).
        \285\ David Enrich, Treasury Halts Plan to Sell Off Citi Stock,
    Wall Street Journal (Dec. 18, 2009) (online at online.wsj.com/article/
    SB126100573858094185.html).
    ---------------------------------------------------------------------------
        Since 2008, Citigroup has made some tangible progress in
    setting forth a new strategic direction and working towards
    stability and profitability. Chief Executive Officer Vikram
    Pandit's strategy is to dismantle the company's financial
    supermarket structure, reduce assets, and focus on the
    company's core business operations contained in Citicorp
    (wholesale banking for large corporate clients and retail
    banking for consumers).\286\ In recent months, Citigroup has
    changed its senior management team, appointing a new chief risk
    officer and making changes in finance, treasury, and consumer
    and corporate banking. Citigroup recently named its fifth chief
    financial officer in five years. These actions were, in large
    part, a reaction to Citigroup's continued poor asset quality
    performance. While credit rating agencies such as Moody's
    Investors Service note that Citigroup's current management is
    making progress in improving its risk management system,
    Moody's concludes that ``these changes will take time to
    achieve and the complexity of the effort is enormous.'' \287\
    It is still too early to tell whether the new management slate
    has the commercial and retail banking experience necessary. In
    addition, four new independent directors with substantial
    banking experience commenced service in 2009. The ultimate
    success of Citigroup's strategy, however, is contingent upon
    how soon the economy recovers. Given that Citigroup still
    remains a large, complex company with 200 million customer
    accounts and operations in over 100 countries, there remains
    the potential for a return to profitability once economic
    recovery sets in. Thanks in large part to the U.S. government's
    substantial assistance, Citigroup's financial position has
    strengthened considerably, and the company has nearly doubled
    its cash holdings to $244.2 billion over the past year.
    ---------------------------------------------------------------------------
        \286\ Citigroup, Citi to Reorganize into Two Operating Units to
    Maximize Value of Core Franchise (Jan. 16, 2009) (online at
    www.citibank.com/citi/press/2009/090116b.htm) (quoting Mr. Pandit as
    saying that ``[g]iven the economic and market environment, we have
    decided to accelerate the implementation of our strategy to focus on
    our core businesses''); Bank of America--Merrill Lynch Financial
    Services Conference, Presentation by Citigroup Vice Chairman Ned Kelly,
    at 1 (Nov. 11, 2009) (online at www.citigroup.com/citi/fin/data/
    p091111a.pdf). Citi Statement on Asset Sales and Business Divestitures,
    supra note 261.
        \287\ Moody's Investors Service, Global Credit Research, Credit
    Opinion: Citigroup Inc. (Oct. 1, 2009).
    ---------------------------------------------------------------------------
        Citigroup's record has been mixed, however, with regard to
    its reorganization and Mr. Pandit's strategy of ``reducing
    assets while optimizing value and mitigating risk.'' \288\
    Citigroup has made some progress in reducing noncore operations
    with the completion of a joint venture between its Smith Barney
    unit and Morgan Stanley's wealth management group, as well as
    with sale of Nikko Cordial Securities and Nikko Asset
    Management. By December 2009, Citigroup had conducted asset
    sales, business divestitures, and natural portfolio run-off,
    reducing Citi Holdings' assets by $281 billion since the first
    quarter of 2008. Citigroup expects an additional $25 billion
    reduction in assets resulting from the Nikko divestitures.\289\
    On the other hand, Citigroup's December 2009 fire sale of
    Phibro, its commodity-trading arm and one of its few
    consistently profitable business units, for only $250 million
    demonstrates the obstacles Citigroup continues to face with
    maximizing value in a difficult economic climate, and
    emphasizes the need for restrictions on the sale of good
    assets.\290\ Much work remains until noncore assets are reduced
    substantially, including the disposition of large noncore
    businesses with substantial consumer credit exposure.\291\
    Therefore, Citigroup's intended further downsizing of Citi
    Holdings will likely take place over several years.
    ---------------------------------------------------------------------------
        \288\ Citigroup Ned Kelly Presentation, supra note 261.
        \289\ Citi Statement on Asset Sales and Business Divestitures,
    supra note 261.
        \290\ This illustration further underscores the influence of the
    U.S. government on TARP-recipient institutions, as Citigroup had
    intended to maintain its core profitable businesses while offloading
    its ``legacy'' businesses.
        \291\ Such major noncore businesses include the CitiFinancial
    consumer loan business, the retail partner credit card business, and
    Primerica Financial Services.
    ---------------------------------------------------------------------------
        In addition, some analysts have suggested that a
    significant downside of Citigroup's new strategy is that the
    institution's operations have become less transparent. As
    compared to JPMorgan, Wells Fargo, and Bank of America--
    institutions that are growing and becoming more complex--these
    analysts argue that Citigroup does a poorer job of explaining
    its strengths and weaknesses.\292\ In their view, Citigroup
    needs to substantially improve disclosure in its securities and
    banking business as well as more country-specific information
    relating to its international consumer banking operations.\293\
    While some of this lack of transparency may be due in part to
    the complexity of Citigroup's organization as compared to other
    financial institutions, the Panel notes that the lack of
    transparency makes it very difficult to evaluate Citigroup's
    progress and efforts to regain profitability.
    ---------------------------------------------------------------------------
        \292\ Conditions improving, but Citi still faces confidence crisis,
    supra note 252 (stating that ``vagueness tends to raise concerns about
    weakness,'' in large part due to its recent financial troubles) (based
    on SNL interviews with Jeff Harte, Sandler O'Neill & Partners analyst,
    Jeff Saut, chief investment strategist at Raymond James & Associates,
    and Christopher Whalen, a managing director at Institutional Risk
    Analytics); see also Peter Eavis, Bright Lights, Transparent Citi, Wall
    Street Journal (Dec. 18, 2009) (online at online.wsj.com/article/
    SB20001424052748703323704574602310167166196.html?) (``For instance,
    Citicorp says its Asian consumer operations have $92 billion of assets,
    but doesn't disclose specifically where they are, let alone the types
    of loans that exist in each country. Oddly, Citi has given a country
    breakdown for the problematic businesses bunched under Citi Holdings,
    but not for Citicorp'').
        \293\ Conditions improving, but Citi still faces confidence crisis,
    supra note 252.
    ---------------------------------------------------------------------------
        While the regulators have permitted Citigroup to repay, the
    critical question is whether Citigroup can become a viable and
    profitable financial institution again.\294\ After two
    consecutive quarterly profits, Citigroup incurred a loss of
    $3.2 billion in the third quarter of 2009, as consumer loan
    losses exceeded trading profits from its bond and currency
    businesses.\295\ Citigroup's credit card and mortgage units
    contributed to approximately $9.4 billion in consumer losses
    for the third quarter alone. Analysts anticipate that Citigroup
    will post a loss of 32 cents per share for the fourth quarter
    of 2009, marking its ``eighth quarterly loss, on a per-share
    basis, in the past nine reporting periods.'' \296\
    ---------------------------------------------------------------------------
        \294\ See discussion of the additional financial burden assumed by
    banks repaying CPP Preferred at Note 213, infra. See also Figure 7,
    infra, for a representation of changes in Citigroup's capital
    structure.
        \295\ Furthermore, unlike JPMorgan Chase or Goldman Sachs,
    Citigroup's operations have not yet generated enough profits to cover
    potentially substantial write-downs in the future. In the third quarter
    of 2009, its core business units did not show an increase in revenue.
        \296\ Conditions improving, but Citi still faces confidence crisis,
    supra note 252. While analysts expect Citi to incur a fourth quarter
    loss, this is due in large part to one-time accounting changes that
    Citi needed to take as part of its recent TARP repayment.
    ---------------------------------------------------------------------------

     FIGURE 7: CITIGROUP'S CAPITAL RATIOS SINCE THE FIRST QUARTER OF 2008
                                     \297\

    ---------------------------------------------------------------------------
        \297\ The Tier 1 ``Well Capitalized'' Capital ratio and Tier 1
    ``Well Capitalized'' Common ratio of 6 percent and 4 percent,
    respectively, are based on the Supervisory Capital Assessment Program's
    desired ratio of capitalization for bank holding companies to ensure a
    sufficient capital buffer against future economic challenges. See Board
    of Governors of the Federal Reserve System, Joint Statement by
    Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of
    Governors of the Federal Reserve System Ben S. Bernanke, Chairman of
    the Federal Deposit Insurance Corporation Sheila Bair, and Comptroller
    of the Currency John C. Dugan regarding The Treasury Capital Assistance
    Program and the Supervisory Capital Assessment Program (May 6, 2009)
    (online at www.federalreserve.gov/newsevents/press/bcreg/
    20090506a.htm). The Tier 1 Capital includes core capital. Tier 1 Common
    Capital includes Tier 1 Capital less non-common elements (i.e.,
    qualifying perpetual preferred stock, qualifying noncontrolling
    interests in subsidiaries, and qualifying mandatorily redeemable
    securities of subsidiary trusts). For the purposes of the SCAP, both
    ratios are stated as a percentage of risk-weighted assets. As losses
    hit common equity first and dividend payment schedules are not fixed,
    the Tier 1 Common capital ratio drills deeper into the capital
    structure by showing the institution's permanent loss absorption
    capacity. According to Citigroup's press release on December 23, 2009,
    if the TARP repayment had been in effect at the end of Q3 2009, the
    Tier 1 Capital ratio would have been 11.0 percent and the Tier 1 Common
    Capital ratio would have been 9.0 percent.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        While Citigroup's stock has climbed back from a low of
    $1.02 per share in March 2009 to its current price of
    $3.59,\298\ it remains unclear whether it can regain its
    footing and reemerge as a profitable institution going forward.
    Citigroup's market capitalization is currently less than Bank
    of America, JPMorgan Chase, and Wells Fargo, all institutions
    that have repaid their TARP assistance in full. Another
    lingering concern is whether Citigroup will be able to
    refinance its obligations coming due in the next few years.
    Citigroup has approximately $30 billion of debt coming due in
    2010, plus $39.5 billion in 2011 and $59.3 billion in
    2012.\299\
    ---------------------------------------------------------------------------
        \298\ This figure reflects Citigroup stock's closing price as of
    Friday, January 8, 2010.
        \299\ Citigroup, 2008 Annual Report on Form 10-K, at 170 (online at
    www.citigroup.com/citi/fin/data/k08c.pdf?ieNocache=265) (hereinafter
    ``Citigroup 2008 Annual Report on Form 10-K'') (detailing aggregate
    annual maturities of long-term debt obligations (based on final
    maturity dates)).
    ---------------------------------------------------------------------------
    If Citigroup is unable to refinance at affordable rates or has
    insuffi- cient cash to cover its maturing obligations, it may
    be forced to face much higher borrowing costs, possibly
    resulting in renewed liquidity problems.
        In addition, Citigroup's exit from the TARP does not come
    without cost. As a result of its TARP repayments and accounting
    charges taken on the value of the repaid trust preferred
    securities and the termination of the AGP loss-sharing
    agreement, Citigroup will incur a $10.1 billion pre-tax loss
    for the fourth quarter of 2009.\300\ The recent stock offering
    also caused substantial dilution for existing Citigroup shares,
    including Treasury's holdings. While Citigroup has written down
    billions of dollars' worth of mortgages on its books, there are
    looming problems in its huge credit card and mortgage
    portfolios.\301\ Citigroup raised interest rates on some credit
    card holders to 29.99 percent in October 2009. Analysts at
    Fitch Ratings predict that Citigroup will continue to need
    substantial loan loss reserves and that its operations will
    remain weak into 2010, but that write-downs on capital market
    exposures are expected to be much lower due to the large amount
    of write-downs already incurred,\302\ while Standard & Poor's
    predicts that Citigroup ``will likely face a tough credit cycle
    over the next two years.'' \303\
    ---------------------------------------------------------------------------
        \300\ Repaying TARP and Other Capital Actions, supra note 235.
        \301\ Standard & Poor's has characterized Citigroup's credit cards
    and residential mortgages as ``[c]hief among its most problematic
    exposures.'' Standard & Poor's, Global Credit Portal, Citigroup Inc.
    (July 31, 2009) (hereinafter ``S&P Citigroup'').
        \302\ Fitch Ratings for Citigroup, supra note 250; Moody's Earnings
    Commentary for Citigroup, supra note 250 (expecting that loan loss
    provisions will rise over the next few quarters, ``increasing the
    probability that Citigroup will report quarterly losses'').
        \303\ S&P Citigroup, supra note 301.
    ---------------------------------------------------------------------------
        Citigroup has been the recipient of substantial government
    assistance on at least three occasions over the past 80
    years.\304\ If Citigroup were to run into trouble again,
    perhaps because of some market disruption, recent history
    suggests that the government would not let it fail. The
    American people and Congress are forced to place an enormous
    amount of faith and trust in Treasury and the regulators'
    decision to allow Citigroup to repay its TARP assistance in the
    hope that it will not return for further rescue in the future.
    During his recent testimony before the Panel, Secretary
    Geithner expressed great confidence in the strength of the
    regulators' decisions concerning repayment, and noted that the
    regulators would not allow or support premature repayment by a
    weak institution.\305\ In addition, Secretary Geithner, on a
    separate occasion, responded to concerns that the regulators
    are allowing the large financial institutions to exit from the
    TARP too quickly, calling the TARP repayments ``good news for
    everyone.'' \306\ While such statements and assurances are
    encouraging, the capital markets do not seem so convinced.\307\
    The repeated failure of Citigroup underscores the gravity and
    seriousness of these repayment decisions and raises critical
    questions about the redesign of the institution so that it is
    less likely to become a systemic risk in the future.
    ---------------------------------------------------------------------------
        \304\ Prior to the TARP bailout, the U.S. government rescued
    Citigroup on at least two other occasions. As part of its response to
    the Great Depression, the federal government instituted several
    policies aimed at preventing the financial sector from failing. Because
    of these policies, Citibank's predecessor, National Bank, was able to
    weather the storm while thousands of smaller banks failed. The risky
    activities of National Bank that contributed to the crash prompted
    Congress to pass the Glass-Steagall Act, which required the separation
    of commercial banking activities from those of investment banks.
    Citibank, operating as Citicorp, was again bailed out in the 1980s
    following the LDC (less-developed-country) debt crisis, in which
    several Latin American countries were unable to meet interest payments
    on massive debts to large American banks due to rising LIBOR rates
    (which were used to price credits to LDCs). In response to the crisis,
    U.S. banking officials waived several capital and accounting standards,
    such as the requirement that banks set aside reserves to cover
    restructurings of loans. Without such regulatory forbearance, it is
    possible that Citicorp would have been deemed insolvent, thereby
    causing a widespread panic. See Robert A. Eisenbeis and Paul M.
    Horvitz, The Role of Forbearance and Its Costs in Handling Troubled and
    Failed Depository Institutions, Reforming Financial Institutions in the
    United States, at 68 (George G. Kaufman ed., 1993) (``Had these
    institutions been required to mark their sometimes substantial holdings
    of underwater debt to market or to increase loan-loss reserves to
    levels close to the expected losses on this debt (as measured by
    secondary market prices), then institutions such as Manufacturers
    Hanover, Bank of America, and perhaps Citicorp would have been
    insolvent''). By the 1990s, Citicorp had not fully recovered and so was
    again helped by a cash infusion from Saudi Prince Walid bin Talal. The
    federal government simultaneously aided in this rescue by cutting
    interest rates so that large banks could borrow money at low rates from
    the Federal Reserve, while lending at higher rates to their customers.
        \305\ Agency Financial Statement 2009, supra note 32 (noting that
    Treasury and the regulators ``would not support'' allowing institutions
    to repay their TARP assistance due to the institution's desire to
    increase executive compensation).
        \306\ MarketWatch.com, Geithner Dismisses Worry Over Bank TARP
    Repayments, MarketWatch (Dec. 15, 2009) (online at www.marketwatch.com/
    story/story/print?guid=3941CA39-8EB4-408C-B147-1BBEE978EB14).
        \307\ As discussed above, Citigroup priced its offering designed to
    facilitate its TARP repayment at $3.15 per share on December 16, 2009,
    reflecting a 20 percent discount from the intended target.
    ---------------------------------------------------------------------------

    6. AIG

                a. Acquisition of Assets and Current Value
        Along with Citigroup and Bank of America, AIG is one of the
    largest recipients of TARP assistance, and has received even
    more assistance from the Federal Reserve. Through a series of
    coordinated efforts, Treasury and the Federal Reserve have
    committed over $182.3 billion to AIG since September 2008.\308\
    Treasury's share of this commitment is $69.8 billion, which it
    holds under the AIGIP/SSFI in the form of preferred shares
    (AIGIP/SSFI Preferred). As of December 31, 2009, $46.9 billion
    in principal amount of the AIGIP/SSFI Preferred was
    outstanding. Like the TIP, the AIGIP/SSFI was ``established to
    provide stability and prevent disruptions to financial markets
    from the failure of institutions that are critical to the
    functioning of the nation's financial system'' and carries
    strict executive compensation guidelines.\309\ AIG is the only
    institution to be provided assistance under this initiative.
    ---------------------------------------------------------------------------
        \308\ According to Treasury, each decision to provide assistance
    was driven by the recognition that AIG faced increasing pressure on its
    liquidity following a downgrade in its credit ratings in May and
    September 2008 and the real risk of further downgrades unless
    extraordinary steps were taken. Treasury conversations with Panel staff
    (Dec. 3, 2009). While AIG tried to raise additional capital in the
    private market in early September 2008, its attempt was unsuccessful.
    AIG, in an unusual set of terms, agreed to post collateral upon
    downgrades in its credit ratings, and also allowed counterparties to
    assert claims. The company's destabilization can be attributed, in
    large part, to these terms.
        \309\ U.S. Department of the Treasury, Road to Stability: Programs
    (online at www.financialstability.gov/roadtostability/programs.htm)
    (accessed Jan. 13, 2010). The Panel notes, however, that Special Master
    Feinberg has exempted certain AIG executives from his default $500,000
    cash salary cap after at least five employees reportedly threatened to
    resign because of the compensation limits. See Steve Eder and Paritosh
    Bensal, AIG executive resigns over pay limits, Reuters (Dec. 30, 2009)
    (online at www.reuters.com/article/idUSTRE5BT45E20091231).
    ---------------------------------------------------------------------------
        The government's assistance to AIG began on September 16,
    2008--one day after the collapse of Lehman Brothers. FRBNY,
    pursuant to the authorization of the Federal Reserve and with
    the support of Treasury,\310\ provided AIG with an $85 billion
    revolving credit facility.\311\ In exchange for the facility
    and $0.5 million,\312\ AIG agreed to establish a trust for the
    sole benefit of the United States Treasury, providing the
    United States Treasury with a 77.9 percent voting interest in
    AIG, held in trust (the Trust Shares).\313\ While Treasury has
    a limited consultative role to the FRBNY in its administration
    of the Trust,\314\ the Trust Shares are not technically TARP
    assets.
    ---------------------------------------------------------------------------
        \310\ The Board of Governors of the Federal Reserve System
    authorized FRBNY to lend under section 13(3) of the Federal Reserve
    Act, which authorizes the Federal Reserve Board to make secured loans
    to individuals, partnerships, or corporations in ``unusual and exigent
    circumstances'' and when the borrower is ``unable to secure adequate
    credit accommodations from other banking institutions.'' This authority
    was designed to allow the Federal Reserve to respond to emergency
    circumstances. It was amended in 1991 to allow the Federal Reserve to
    lend directly to securities firms during financial crises.
        \311\ Federal Reserve Board authorizes lending to AIG, supra note
    110; Board of Governors of the Federal Reserve System and U.S.
    Department of the Treasury, U.S. Treasury and Federal Reserve Board
    Announce Participation in AIG Restructuring Plan (Mar. 2, 2009) (online
    at www.federalreserve.gov/newsevents/press/other/20090302a.htm)
    (hereinafter ``AIG Restructuring Plan Announcement''). The facility was
    subsequently revised:
         In November 2008, the initial $85 billion to be made
    available was reduced to $60 billion. Additionally, the facility's
    initial term of 24 months was extended to five years. These and other
    changes in terms were prompted by the fact that credit rating agencies
    were prepared to further downgrade the company's credit ratings based
    upon their conclusion that the FRBNY revolving credit facility, in the
    form of debt, made the company overleveraged.
         In March 2009 the Federal Reserve made several changes to
    the facility. The facility was reduced from $60 billion to no less than
    $25 billion, in exchange for FRBNY taking preferred interests in two
    special purpose vehicles created to hold all of the outstanding common
    stock of American Life Insurance Company (ALICO) and American
    International Assurance Company Ltd. (AIA), two life insurance holding
    company subsidiaries of AIG. While AIG will retain control of ALICO and
    AIA, FRBNY has certain governance rights in order to protect its
    interests. The Federal Reserve also authorized FRBNY to make new loans,
    up to an aggregate amount of approximately $8.5 billion, to special
    purpose vehicles (SPVs) created by these life insurance subsidiaries,
    which would repay the loans from cash flows from designated blocks of
    existing life insurance policies. The proceeds of these new FRBNY loans
    would be used to pay down an equivalent amount of outstanding debt
    under the facility. On December 1, 2009, AIG announced that it
    consummated these two debt-for-equity transactions by selling preferred
    equity stakes in these two subsidiaries to FRBNY, thereby reducing
    AIG's debt to FRBNY to $17 billion, excluding interest and fees. AIG's
    recent decision to have a public stock offering for AIA on the Hong
    Kong stock exchange (which might raise as much as $20 billion) is
    designed to help AIG repay its government assistance.
        \312\ As a discount, the initial commitment fee AIG paid for the
    Revolving Credit Facility was reduced by $0.5 million and will not be
    repaid. Initially, AIG drew down $28 billion on this facility on
    September 17, 2008.
        \313\ Federal Reserve Board authorizes lending to AIG, supra note
    110.
        The Credit Facility Trust Agreement provides that the trust is for
    the sole benefit of the United States Treasury, meaning that any
    property distributable to the United States Treasury as a beneficiary
    must be paid to the Treasury for deposit into the U.S. Treasury General
    Fund as miscellaneous receipts. See AIG Credit Facility Trust
    Agreement, at Sec. 1.01 (Jan. 16, 2009) (online at www.newyorkfed.org/
    newsevents/news/markets/2009/AIGCFTAgreement.pdf) (hereinafter ``AIG
    Credit Facility Trust Agreement'').
        The interest is in the form of preferred stock, convertible into
    AIG's common stock. The AIG Credit Facility Trust Agreement was not
    executed until January 16, 2009. On March 4, 2009, AIG, as required by
    the Trust Agreement governing the Revolving Credit Facility, AIG agreed
    to issue shares of convertible preferred stock an approximately 77.9
    percent equity interest in AIG to an independent trust for the sole
    benefit of the United States Treasury. The conversion formula
    stipulates that the trust will receive 79.9 percent of AIG's common
    stock, less the percentage of common stock that may be acquired by or
    for the benefit of the United States Treasury as a result of warrants
    or other convertible preferred stock held by Treasury. Treasury
    received a warrant to purchase a number of shares equal to two percent
    of AIG's common stock in connection with its November 2008 preferred
    stock purchase, and an additional warrant to purchase AIG common stock
    in connection with its April 2009 preferred stock purchase. Subsequent
    to the initial agreement, a reverse stock split of AIG's common stock
    increased the government's equity interest to 79.8 percent.
        \314\ Under section 1.02 of the Credit Facility Trust Agreement,
    FRBNY has to consult with the Treasury Department in appointing the
    trustees. FRBNY also has to consult with the Treasury with respect to
    filling any trustee vacancies. Trustees can be removed for engaging in
    criminal conduct or if it has been reasonably determined by FRBNY, in
    consultation with Treasury, that a trustee has ``demonstrated
    untrustworthiness or to be derelict in the performance of his or her
    duties.'' AIG Credit Facility Trust Agreement, supra note 313.
    ---------------------------------------------------------------------------
        On November 25, 2008, Treasury provided AIG with a $40
    billion capital infusion under the AIGIP/SSFI.\315\ Treasury
    received $40 billion face value of preferred shares and a
    warrant to purchase approximately two percent of the shares of
    AIG's common stock.\316\ AIG used these funds to pay down $40
    billion of the amounts under the Revolving Credit Facility that
    FRBNY had provided in September, $72 billion of which was the
    maximum that had been drawn down at that point, but the
    cumulative outstanding balance was $69.25 billion on the
    particular days preceding the AIGIP/SSFI infusion.\317\
    ---------------------------------------------------------------------------
        \315\ Treasury to Invest in AIG Restructuring Under EESA, supra
    note 110; U.S. Department of the Treasury, TARP AIG SSFI Investment
    Term Sheet (online at www.treas.gov/press/
    releases/reports/111008aigtermsheet.pdf) (hereinafter ``AIG SSFI
    Investment Term Sheet'').
        \316\ AIG SSFI Investment Term Sheet, supra note 315. See Note 314
    for further discussion of the conversion calculation.
        \317\ At the same time, the Federal Reserve created two separate
    lending facilities for AIG assets. In addition to authorizing FRBNY to
    restructure the terms of its revolving credit facility to AIG, the
    Federal Reserve authorized FRBNY to create, and lend up to $22.5
    billion to, an SPV called Maiden Lane II LLC, designed to purchase
    residential mortgage-backed securities from AIG life insurance
    companies. AIG will absorb the first $1 billion of losses due to its
    acquisition of a subordinated $1 billion interest in the facility. On
    December 12, 2008, FRBNY extended a $19.5 billion loan to Maiden Lane
    II LLC. The Federal Reserve further authorized FRBNY to create and lend
    up to $30 billion to another SPV called Maiden Lane III LLC designed to
    purchase collateralized debt obligations (CDOs) from AIG's
    counterparties. In two separate disbursements in November and December
    2008, FRBNY funded Maiden Lane III LLC with a $24.3 billion senior loan
    and AIG agreed to absorb the first $5 billion of losses after providing
    a $5 billion equity investment. AIG's counterparties, in exchange for
    agreeing to terminate their credit default swap (CDS) contracts, were
    allowed to retain the $35 billion in collateral previously posted by
    AIG. TARP funds were not directly used in either the Maiden Lane II or
    III transactions.
    ---------------------------------------------------------------------------
        During March and April 2009, Treasury and the Federal
    Reserve provided additional assistance and further restructured
    the terms of their existing assistance.\318\ On April 17, 2009,
    Treasury provided AIG with a commitment to invest an additional
    $29.8 billion on certain terms and conditions. This facility,
    to be used on a standby basis, allows AIG to issue to Treasury
    up to $29.8 billion in AIGIP/SSFI Preferred over five years to
    meet its liquidity and capital needs as they arise. Treasury
    will receive AIGIP/SSFI Preferred in the amount of each
    drawdown. In connection with providing AIG this additional
    commitment, Treasury received a warrant to purchase up to 3,000
    shares of AIG common stock.\319\ As of December 31, 2009, $5.3
    billion had been drawn down under this facility. AIG can
    continue to draw on the AIGIP/SSFI investments through April
    17, 2014, provided it remains in compliance with certain
    conditions.
    ---------------------------------------------------------------------------
        \318\ See Note 311, for further discussion of some of the key
    components of the March restructuring.
        \319\ U.S. Department of the Treasury, U.S. Treasury and Federal
    Reserve Board Announce Participation in AIG Restructuring Plan (Mar. 2,
    2009) (online at www.treas.gov/press/releases/tg44.htm) (hereinafter
    ``Participation in AIG Restructuring Plan Announcement'').
    ---------------------------------------------------------------------------

           FIGURE 8: TREASURY'S PREFERRED STOCK HOLDINGS IN AIG \320\

    ---------------------------------------------------------------------------
        \320\ The value of Treasury's preferred stock holdings in AIG does
    not include the additional obligations of $1.6 billion in cumulative
    unpaid dividends outstanding at the time of exchange from cumulative
    preferred to non-cumulative preferred shares (April 17, 2009) and $165
    million commitment fee to be paid in three equal installments over the
    five-year life of the commitment facility. See TARP Transactions Report
    for Period Ending December 30, 2009, supra note 166.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        On April 17, 2009, the $40 billion face amount of AIGIP/
    SSFI Preferred that Treasury received in its November 2008
    AIGIP/SSFI investment was exchanged for $41.6 billion \321\ of
    noncumulative preferred shares, allowing AIG to reduce its
    leverage and dividend requirements.\322\
    ---------------------------------------------------------------------------
        \321\ The $1.6 billion difference reflects a compounding of
    accumulated but unpaid dividends owed by AIG to Treasury on the
    cumulative preferred stock.
        \322\ Participation in AIG Restructuring Plan Announcement, supra
    note 319.
    ---------------------------------------------------------------------------
        The following tables show Treasury's and the Federal
    Reserve's holdings in AIG as of December 31, 2009.

                                 FIGURE 9: DEPARTMENT OF TREASURY HOLDINGS IN AIG AS OF DECEMBER 31, 2009 [Dollars in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Revenues
                       Assets                        Principal  Amount             Acquisition  Cost           Generated     Estimated Value  as of 12/31/09
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    AIGIP/SSFI Non-Cumulative Preferred........  \323\ $46,900,000,000      $45,300                             \324\ $0                      \325\ $13,200

    Warrants....................................           \326\ 53,798,766         Received as part of     N/A              Low         High         Best
                                                                                     initial AIGIP/SSFI                    $44.9     $1,052.8      $556.4
                                                                                            investments\323\ The $1.6 billion difference between the principal amount and acquisition cost reflects a compounding of accumulated but unpaid dividends owed by
      AIG to Treasury.
    \324\ According to Treasury, there have been no revenues generated from its AIGIP/SSFI investments in AIG because AIG has not declared or paid any
      dividends since the inception of Treasury's preferred equity investments.
    \325\ This figure reflects Treasury's estimated value of its AIGIP/SSFI investments in AIG as of September 30, 2009. Agency Financial Statement 2009,
      supra note 32, at 17.
    \326\ AIG's stock split 20 to 1 in April 2009. The U.S. Government will get 1/20th share of AIG common stock every warrant exercised, so the government
      will get 2,690,088.3 shares of common stock if all warrants are exercised.

        FIGURE 10: U.S. TREASURY HOLDINGS IN AIG AS OF DECEMBER 31, 2009
                              [Dollars in millions]
    ------------------------------------------------------------------------
                                                      Estimated Value  as of
                   Asset                   Number            9/30/09
    ------------------------------------------------------------------------
    Preferred Securities Convertible        100,000           \327\ $23,500
     into Common, held by Trust.......
    ------------------------------------------------------------------------
    \327\ According to Treasury, ``[t]he value recorded is based on the
      market value of the trust's AIG holdings at September 30, 2009; as the
      underlying AIG common stock is actively traded on the New York Stock
      Exchange, this represents the best independent valuation available for
      the government's beneficial interest.'' U.S. Department of the
      Treasury, 2009 Agency Financial Report--Department of Treasury, at
      182, 194-95 (online at www.treas.gov/offices/management/dcfo/
      accountability-reports/2009-afr.shtml). Treasury will re-value the
      trust each year until the trust is liquidated.

       FIGURE 11: FEDERAL RESERVE HOLDINGS IN AIG AS OF DECEMBER 31, 2009
                              [Dollars in millions]
    ------------------------------------------------------------------------
                                         Amount of
                   Asset                 assistance    Outstanding Balance
                                         authorized
    ------------------------------------------------------------------------
    Revolving Credit Facility.........  \328\ $35,0            \329\ $22,000
                                                 00
    Maiden Lane II....................  \330\ 22,50             \331\ 15,700
                                                  0
    Maiden Lane III...................  \332\ 30,00             \333\ 18,200
                                                  0
                                       -------------------------------------
        Total.........................       87,500                  55,900
    ------------------------------------------------------------------------
    \328\ The facility was initially $85 billion but was reduced to $60
      billion in November 2008, and further reduced to $35 billion in
      December 2009.
    \329\ This amount includes outstanding principal and capitalized
      interest, net of unamortized deferred commitment fees and allowance
      for loan restructuring.
    \330\ While FRBNY was authorized to provide a loan to Maiden Lane II up
      to $22.5 billion, it lent only $19.5 billion of this amount.
    \331\ As of December 31, 2009, the outstanding principal amount was
      $15.739 billion, and the accrued interest payable to FRBNY was $265
      million. The net portfolio holdings of Maiden Lane II as of December
      31, 2009, as defined by FRBNY, were $15.697 billion.
    \332\ While FRBNY was authorized to provide a loan to Maiden Lane III up
      to $30 billion, it lent only $24.3 billion of this amount.
    \333\ As of December 31, 2009, the outstanding principal amount was
      $18.159 billion, and the accrued interest payable to FRBNY was $340
      million. The net portfolio holdings of Maiden Lane III as of December
      31, 2009, as defined by FRBNY, were $22.660 billion.

                b. Disposal of Assets and Recovery of Expended Amounts
        The Administration and Treasury in particular have
    articulated the view that public ownership of financial
    institutions is not a policy objective.\334\ While public
    ownership has been the outcome of the federal government's
    intervention in AIG, the primary objective of Treasury and the
    Federal Reserve with respect to AIG is to stabilize the company
    enough to replace federal government assistance with private
    sector resources in order to create a ``more focused,
    restructured, and viable economic entity as rapidly as
    possible.'' \335\
    ---------------------------------------------------------------------------
        \334\ Agency Financial Statement 2009, supra note 32; Allison
    Testimony before House Oversight and Government Reform Committee, supra
    note 118, at 5. The Administration has also articulated a set of four
    guidelines that will govern its approach to managing ownership
    interests in financial and automotive companies. These include a desire
    not ``to own equity stakes in companies any longer than necessary,''
    and the objective ``to dispose of its ownership interests as soon as
    practicable.'' White House, Fact Sheet: Obama Administration Auto
    Restructuring Initiative General Motors Restructuring (June 30, 2009)
    (online at financialstability.gov/latest/05312009_gm-factsheet.html)
    (listing the guidelines governing the government's ownership interests
    in financial institutions and automotive companies).
        \335\ AIG Restructuring Plan Announcement, supra note 311.
    ---------------------------------------------------------------------------
        Treasury's approach to its AIG investment now seems to have
    shifted from balancing its three pillars of asset management to
    a strategy based largely on preventing the detrimental effect
    on market confidence that would result if Treasury were to not
    deliver on its promise to provide financial assistance, as well
    as preserving the value of its investment.\336\ The public
    purpose in keeping the AIG parent company solvent, therefore,
    is based on the government's initial decision to not let AIG
    fail in September 2008, and if the U.S. government were to act
    otherwise, it would jeopardize not only its financial
    credibility, but also the value of its sizeable
    investment.\337\
    ---------------------------------------------------------------------------
        \336\ Treasury conversations with Panel staff (Dec. 15, 2009).
        \337\ Treasury conversations with Panel staff (Dec. 15, 2009).
    ---------------------------------------------------------------------------
        Earlier government pronouncements with respect to
    divestment included maximizing value as an objective. In 2008,
    Treasury and the Federal Reserve noted that the federal
    government ``intends to exit its support of AIG over time in a
    disciplined manner consistent with maximizing the value of its
    investments and promoting financial stability.'' \338\ At the
    beginning of 2009, the focus appeared to shift somewhat with
    the change in the overall market situation, toward a faster
    exit to the extent possible without destabilization. Earlier
    this year, Secretary Geithner stated that the U.S. government
    ``will continue our aggressive efforts to resolve the future
    status of AIG in a manner that will reduce the systemic risks
    to our financial system while minimizing the loss to taxpayers.
    And we will explore any and all responsible ways to accelerate
    this wind down process.'' \339\ Moreover, when asked whether he
    would like to see AIG ``prosper, make a lot of money again and
    be successful'' in a recent Meet the Press interview, Secretary
    Geithner commented that he would like to see AIG ``bring down
    the risk that brought that company to the edge of collapse and
    to restructure its business so the taxpayer can get out.''
    \340\ Treasury's focus is clearly on medium-term exit rather
    than long-term investment, although AIG is not expected to
    fully repay the government's assistance for several years.\341\
    ---------------------------------------------------------------------------
        \338\ Board of Governors of the Federal Reserve System, Federal
    Reserve Board and Treasury Department Announce Restructuring of
    Financial Support to AIG (Nov. 10, 2008) (online at
    www.federalreserve.gov/newsevents/press/other/20081110a.htm); Treasury
    conversations with Panel staff (Dec. 3, 2009).
        \339\ U.S. Department of the Treasury, Letter from Secretary
    Geithner on AIG to House Speaker Nancy Pelosi (Mar. 17, 2009) (online
    at www.treas.gov/press/releases/tg61.htm).
        \340\ Interview with Treasury Secretary Timothy F. Geithner, Meet
    the Press with David Gregory, NBC (Nov. 1, 2009) (online at
    www.msnbc.msn.com/id/33562673/ns/meet_the_press/).
        \341\ Treasury conversations with Panel staff (Dec. 16, 2009);
    Treasury conversations with Panel staff (Dec. 3. 2009).
    ---------------------------------------------------------------------------
        Similar to the CPP Preferred, the AIGIP/SSFI Preferred
    shares have no mandatory redemption date, and can be disposed
    of, at least in theory, to third parties.\342\ FRBNY's
    Revolving Credit Facility is available until September 16,
    2013. The government agencies are not, however, intending to
    remain involved in AIG through that date.
    ---------------------------------------------------------------------------
        \342\ See Securities Purchase Agreement dated as of April 17, 2009
    between American International Group, Inc. and United States Department
    of the Treasury, at Sec. 4.9 (online at www.financialstability.gov/
    docs/agreements/Series.F.Securities.Purchase.Agreement.pdf).
    ---------------------------------------------------------------------------
        While Treasury's objective is to make an orderly exit ``as
    soon as practicable,'' Treasury understands that the
    government's exit from AIG is constrained by the same factors
    that prompted the government to provide AIG with assistance in
    late 2008--the threat of continued downgrades in the company's
    credit ratings and the loss in market confidence that would
    cause. Credit rating agencies such as Moody's have indicated
    that AIG's current credit ratings are maintained only because
    of the extraordinary government assistance,\343\ making the
    government extra cautious about any premature exit that might
    trigger a ratings downgrade and thereby destabilize AIG and the
    financial system. In Treasury's view, therefore, the key to
    allowing the government to exit in an orderly fashion is to do
    so in a manner that allows AIG to maintain its credit ratings
    on a stand-alone basis and to remain well-capitalized without
    government assistance.\344\ Given the extraordinary government
    assistance provided to AIG, such an exit will take time to
    effectuate, but Treasury believes that it is the optimal way to
    protect the value of its investments and to avoid causing a
    loss in market confidence, as discussed above.\345\
    ---------------------------------------------------------------------------
        \343\ Treasury conversations with Panel staff (Dec. 16, 2009);
    Treasury conversations with Panel staff (Dec. 3, 2009); see Moody's
    Investors Service, Issuer Comment: Moody's sees AIG holding its ground
    through 3Q09 (Nov. 9, 2009) (hereinafter ``Moody's sees AIG holding its
    ground through 3Q09''); Moody's Investors Service, Issuer Comment: AIG
    shows signs of stabilization but risks remain, says GAO (Sept. 28,
    2009) (hereinafter ``AIG shows signs of stabilization but risks
    remain'').
        \344\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \345\ Treasury conversations with Panel staff (Dec. 16, 2009).
    ---------------------------------------------------------------------------
        Treasury's AIGIP/SSFI investments are junior to the FRBNY's
    revolving credit facility, which is collateralized by all the
    assets of AIG and of its principal non-regulated subsidiaries.
    This means that AIG's repayment of Treasury's AIGIP/SSFI equity
    investments can only occur after it has completely repaid the
    Revolving Credit Facility.
        The Federal Reserve expects that the Revolving Credit
    Facility will be repaid from the proceeds of the sale of
    certain of AIG's assets and businesses, including the future
    initial public offerings of its two insurance company
    subsidiaries, the American International Assurance Company Ltd.
    (AIA) and the American Life Insurance Company (ALICO),\346\ the
    timing of which is contingent upon market conditions.\347\ As
    discussed above, the ceiling on this facility has been reduced
    gradually as a result of several restructurings since September
    2008, as well as certain asset sales that have already
    occurred, and currently stands at $35 billion, of which $22
    billion, including principal and interest, but net of any fees,
    is outstanding.\348\
    ---------------------------------------------------------------------------
        \346\ With respect to the Maiden Lane facilities, FRBNY anticipates
    that its loans to Maiden Lane II LLC and Maiden Lane III LLC, both of
    which have six-year terms but may be extended at the Federal Reserve's
    discretion, will be repaid with the proceeds from the interest and
    principal payments or proceeds from the liquidation of the assets held
    by the facilities. Letter from Scott G. Alvarez, general counsel, Board
    of Governors of the Federal Reserve System, and Thomas C. Baxter, Jr.,
    general counsel, Federal Reserve Bank of New York, to Neil Barofsky,
    special inspector general, Troubled Asset Relief Program (Nov. 15,
    2009). FRBNY has retained BlackRock Financial Management Inc. to manage
    the Maiden Lane II and III asset portfolios, with the objective of
    maximizing long-term cash flows to pay the loans (including principal,
    interest, and contingent interest), while ``refraining from investment
    actions that would disturb general financial market conditions.''
    Federal Reserve Bank of New York, Maiden Lane II Transactions (online
    at www.newyorkfed.org/markets/maidenlane2.html); Federal Reserve Bank
    of New York, Maiden Lane III Transactions (online at
    www.newyorkfed.org/markets/maidenlane3.html). The Federal Reserve has
    indicated that it plans to hold the Maiden Lane assets until they
    mature or increase enough in value so as to allow the Federal Reserve
    to maximize its recovery through asset sales. AIG Restructuring Plan
    Announcement, supra note 311. While these steps will take time, FRBNY
    expects that the proceeds from the asset sales ``should enable AIG to
    repay the New York Fed in full.'' House Committee on Financial
    Services, Testimony of William C. Dudley, president and chief executive
    officer of the Federal Reserve Bank of New York, Oversight of the
    Federal Government's Intervention at American International Group,
    111th Cong., at 2 (Mar. 24, 2009) (hereinafter ``Dudley Testimony
    before House Financial Services Committee''); Senate Committee on
    Banking, Housing, and Urban Affairs, Testimony of Donald L. Kohn, vice
    chairman, Board of Governors of the Federal Reserve System, American
    International Group: Examining what went wrong, government
    intervention, and implications for future regulation, 111th Cong., at
    10 (Mar. 5, 2009) (online at banking.senate.gov/public/
    index.cfm?FuseAction=Files.View&FileStore_id=aa8bcdf2-f42b-4a60-b6f6-
    cdb045ce8141) (stating that the investment manager for FRBNY projects
    that the Maiden Lane II and Maiden Lane III loans ``will be repaid over
    time with no loss to the taxpayer,'' even under highly stressed
    scenarios).
        \347\ Federal Reserve Board authorizes lending to AIG, supra note
    110.
        \348\ For further discussion of the terms and current status of the
    revolving credit facility, see footnote 311.
    ---------------------------------------------------------------------------
        Once AIG repays the Revolving Credit Facility in full and
    thereby reduces its leverage, Treasury expects that AIG will be
    able to access the capital markets on its own and consider
    different capital market strategies to begin repaying its
    obligations to Treasury.\349\ As Assistant Secretary Allison
    stated, ``[u]pon the repayment in full of its debt to the
    FRBNY, AIG will then focus on building value in its remaining
    insurance businesses, Chartis, Domestic Life and Retirement
    Services and American General and Valic, as well as ILFC, its
    aircraft leasing business, and American General, its consumer
    finance business.'' \350\ Treasury has indicated, however, that
    among the strategies AIG may pursue to facilitate the repayment
    of the AIGIP/SSFI Preferred is a recapitalization pursuant to
    which all or a portion of them would be converted into common
    stock.\351\ Such a recapitalization would boost AIG's capital
    ratios, further buttressing its ability to maintain an
    investment grade rating on a stand-alone basis and facilitating
    Treasury's exit from its investment by permitting it to sell
    common stock on the New York Stock Exchange as market
    conditions permit.\352\
    ---------------------------------------------------------------------------
        \349\ Treasury conversations with Panel staff (Dec. 16, 2009);
    Treasury conversations with Panel staff (Dec. 3, 2009). For further
    discussion on Treasury's recently published financial statements which
    shows Treasury's view as to the expected loss amount from TARP AIGIP
    investments in AIG, see Section D.6, infra.
        \350\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 11.
        \351\ Treasury conversations with Panel staff (Dec. 16, 2009).
        \352\ Treasury conversations with Panel staff (Dec. 16, 2009); see
    also Allison Testimony before House Oversight and Government Reform
    Committee, supra note 118, at 11 (stating that ``AIG and Treasury are
    in active, ongoing discussions with regard to strategies to allow
    Treasury to monetize its investment in AIG, once the FRBNY has been
    paid in full'').
    ---------------------------------------------------------------------------
        The stabilization of AIG ``so that it no longer poses a
    disruptive threat'' \353\ to the financial system and the
    economy will inevitably be a multi-year process.\354\ This is
    especially the case given the current market conditions and
    continued economic uncertainty. As Ben S. Bernanke, chairman of
    the Board of Governors of the Federal Reserve System,
    testified, ``[h]aving lent money to avert the risk of a global
    financial meltdown, we found ourselves in the uncomfortable
    situation of overseeing both the preservation of its value and
    its dismantling, a role quite different from our usual
    activities.'' \355\ Chairman Bernanke further stated that
    ``[u]sing our rights as a creditor, we have worked with AIG's
    new management team to begin the difficult process of winding
    down [AIG Financial Products] and to oversee the company's
    restructuring and divestiture strategy.'' \356\
    ---------------------------------------------------------------------------
        \353\ Dudley Testimony before House Financial Services Committee,
    supra note 346.
        \354\ Treasury conversations with Panel staff (Dec. 3, 2009). Then-
    CEO Edward Liddy testified in May that he expects AIG to take three to
    five years to complete its restructuring and repay Treasury and the
    Federal Reserve. House Committee on Oversight and Government Reform,
    Testimony of Edward Liddy, chief executive officer of AIG, AIG: Where
    is the Taxpayer Money Going?, 111th Cong. (May 13, 2009) (online at
    oversight.house.gov/images/stories/documents/20090512165421.pdf).
        \355\ House Committee on Financial Services, Testimony of Ben S.
    Bernanke, chairman of the Board of Governors of the Federal Reserve
    System, Oversight of the Federal Government's Intervention at American
    International Group, 111th Cong., at 4 (Mar. 24, 2009).
        \356\ Id.
    ---------------------------------------------------------------------------
        For its part, AIG has offered some insight into how it
    expects to become profitable enough so that it can repay its
    government assistance. Since September 2008, the company has
    been focused on executing an asset disposition plan, preserving
    and enhancing the value of key business operations, and placing
    the company on a path toward future profitability.\357\ AIG
    Chief Executive Officer Robert Benmosche states that his
    immediate concerns are to restore stability and profitability
    to the company.\358\ At a town hall-style meeting for company
    employees held in August 2009, Mr. Benmosche stated that the
    company plans to rebuild businesses and will not be pressured
    by the federal government into selling assets at ``unfavorable
    prices.'' \359\ AIG owes ``the U.S. government a lot of money
    and we are not going to be able to pay it back just by our
    profits,'' he said, and, AIG ``will sell some of the company
    off but only at the right time at the right price.'' \360\ With
    respect to the winding down of AIG Financial Products (AIGFP),
    the business unit whose derivative trades in part brought AIG
    to the brink of collapse, Mr. Benmosche has emphasized
    maximizing asset values rather than selling the assets with
    speed.\361\ Furthermore, Mr. Benmosche has postponed planned
    sales of an investment-advisory unit and AIG's two Japanese
    life insurance companies, in order to build value in those
    assets. While the restructuring is still taking place, Mr.
    Benmosche's recent statements suggest that AIG is moving away
    from the path set by former Chief Executive Officer Edward
    Liddy, who planned to sell off units last year before they lost
    value, but then delayed those plans as deteriorating economic
    conditions interfered with the company's ability to engage in
    such sales. In AIG's view, the company has stabilized
    significantly from where it was a year ago, and even six months
    ago.\362\ AIG management also believes that the current amount
    of U.S. government assistance is ``sufficient for the
    restructuring process.'' \363\
    ---------------------------------------------------------------------------
        \357\ AIG conversations with Panel staff (Dec. 11, 2009). See also
    American International Group, AIG Reports Third Quarter 2009 Results
    (Nov. 6, 2009) (online at www.aigcorporate.com/investors/2009_November/
    AIG%203Q09%20Press%20Release.pdf) (hereinafter ``AIG Reports Third
    Quarter 2009 Results'') (highlighting the progress AIG has made in its
    restructuring efforts). AIG's restructuring plan has four key goals:
        (1) Creation of strong, more independent insurance businesses
    worthy of investor confidence to stabilize and protect the value of
    AIG's important franchise businesses.
        (2) Divestment of assets and implementation of restructuring
    program to enable repayment of loans made by the U.S. government.
        (3) Comprehensive review of AIG's cost structure to significantly
    reduce operating costs.
        (4) Wind-down of AIG's exposure to certain financial products and
    derivatives trading activities to reduce excessive risk.
        American International Group, Inc., The Restructuring Plan (online
    at www.aigcorporate.com/restructuring/index.html) (accessed Jan. 13,
    2010).
        \358\ Hugh Son and Boris Cerni, Benmosche Says He'll Rebuild Units
    to Repay U.S., Bloomberg (Aug. 20, 2009) (online at www.bloomberg.com/
    apps/news?pid=20601087&sid=aMclXyXbD2HA).
        \359\ Id.
        \360\ Id.
        \361\ Id.; AIG conversations with Panel staff (Dec. 11, 2009).
        \362\ AIG conversations with Panel staff (Dec. 11, 2009).
        \363\ AIG conversations with Panel staff (Dec. 11, 2009).
    ---------------------------------------------------------------------------
        The Trust Shares will be disposed of separately. They are
    held in a trust for the benefit of the United States Treasury,
    overseen by three independent trustees.\364\ Pursuant to the
    terms of the Credit Facility Trust Agreement, the trustees are
    responsible for managing the equity stake in matters such as
    voting and for establishing a plan to dispose of the shares
    over time, but must refrain from interfering in the day-to-day
    management of the company.\365\ The Credit Facility Trust
    Agreement provides that the trustees must act ``in or not
    opposed to the best interests of Treasury.'' \366\ The Credit
    Facility Trust Agreement further stipulates that the trustees
    cannot be Treasury or FRBNY employees.
    ---------------------------------------------------------------------------
        \364\ The three independent trustees are Jill M. Considine, former
    chairman of the Depository Trust & Clearing Corporation; Chester B.
    Feldberg, former chairman of Barclays Americas; and Douglas L. Foshee,
    president and chief executive officer of El Paso Corporation. The
    Treasury Department has no control over the trust and cannot direct the
    trustees.
        \365\ AIG Credit Facility Trust Agreement, supra note 313.
        \366\ AIG Credit Facility Trust Agreement, supra note 313. Note
    that the trust is for the benefit of the United States Treasury, not
    the United States Department of the Treasury. The AIG Credit Facility
    Trust Agreement uses both terms without explaining the distinction,
    leaving some question as to whether the Treasury Department is the
    trust's beneficiary. As noted above, the Agreement stipulates that
    ``any property distributable to Treasury as beneficiary hereunder shall
    be paid to Treasury for deposit into the General Fund as miscellaneous
    receipts.'' Id. at Sec. 1.01.
    ---------------------------------------------------------------------------
        The articulated justification for establishing a trust was
    to avoid conflicts of interest. The Credit Facility Trust
    Agreement provides, ``to avoid any possible conflict with its
    supervisory and monetary policy functions, FRBNY does not
    intend to exercise any discretion or control over the voting
    and consent rights associated with the Trust Stock.'' \367\ In
    exercising their discretion under the Credit Facility Trust
    Agreement, the trustees are advised, however, that FRBNY
    believes that AIG ``being managed in a manner that will not
    disrupt financial market conditions, [is] consistent with
    maximizing the value of the Trust Stock.'' \368\ Any proceeds
    from the ultimate sale of the Trust Shares will go directly to
    the U.S. Treasury.
    ---------------------------------------------------------------------------
        \367\ AIG Credit Facility Trust Agreement, supra note 313; Dudley
    Testimony before House Financial Services Committee, supra note 346
    (stating that ``[i]n light of the inherent conflicts that would arise
    from either the U.S. government or the Federal Reserve exerting
    ownership control over the world's largest insurer, the Federal
    Reserve, with the support of the Treasury Department, directed in the
    loan agreement that an approximately 79.9 percent equity interest in
    AIG be issued to an independent trust established for the sole benefit
    of the United States Treasury'').
        \368\ AIG Credit Facility Trust Agreement, supra note 313, at 2.0.
    ---------------------------------------------------------------------------
        While a trust structure does provide some important
    benefits and value, the Panel notes that there have been
    various criticisms raised about the AIG trust structure. As the
    Panel noted in its September Oversight Report, Professor J.W.
    Verret articulated three criticisms of the AIG trust structure
    in his May 2009 testimony before the House Oversight and
    Government Reform Committee.\369\ First, he discussed how the
    AIG trustees are required to ``manage the trust in the best
    interests of Treasury, rather than the U.S. taxpayers
    specifically.'' \370\ Second, he believes that the trust should
    require the trustees to act to maximize the value for the trust
    beneficiaries.\371\ Third, Professor Verret raised concerns
    that the Trust Agreement might allow trustees to benefit
    personally from investment opportunities that belong to
    AIG.\372\ Some members of Congress have also raised concerns
    about the AIG trust structure. Representatives Darrell Issa (R-
    CA) and Spencer Bachus (R-AL) have sent letters to Treasury and
    SIGTARP calling for an audit of the AIG trust and setting out
    criticisms of the trust structure, including the ``lack of
    standard fiduciary duties,'' the Trust's ``broad
    indemnification of the actions of the trustees,'' and lack of
    accountability on the part of the trustees.\373\ Congressman
    Gerry Connolly (D-VA) has expressed some concern that the AIG
    trustees are not independent enough from the Federal Reserve,
    and do not have enough power relative to the Federal Reserve in
    exercising their duties.\374\ Furthermore, Congressman Edolphus
    Towns (D-NY), chairman of the House Committee on Oversight and
    Government Reform, and Congressman John Tierney (D-MA), have
    both expressed concerns about the actual level of power the
    trustees have over AIG decisions, the degree of transparency
    and accountability their decisions have, and the overall lack
    of clarity as to what role they play.\375\
    ---------------------------------------------------------------------------
        \369\ House Oversight and Government Reform Committee, Testimony of
    Professor J.W. Verret, Panel II: AIG: Where is the Taxpayer's Money
    Going? (May 13, 2009) (online at
    oversight.house.gov/images/stories/documents/20090512175538.pdf)
    (hereinafter ``Verret Testimony before House Oversight and Government
    Reform Committee''). Professor Verret is an assistant professor of law
    at George Mason University, and a senior scholar with the Mercatus
    Center. He has also served as a consultant for SIGTARP and the GAO on a
    corporate governance audit for TARP-recipient institutions.
        \370\ Id.
        \371\ Id.
        \372\ Id.
        \373\ Letter from Representatives Spencer Bachus and Darrell Issa
    to Neil Barofsky (Aug. 31, 2009); see also Letter from Representatives
    Spencer Bachus and Darrell Issa to Secretary Timothy F. Geithner (Aug.
    31, 2009).
        \374\ See House Committee on Oversight and Government Reform,
    Transcript Statement of Representative Connolly, AIG: Where is the
    Taxpayer Money Going?, 111th Cong. (May 13, 2009) (questioning the
    distinction between the role of the trustees and ``those members of the
    Federal Reserve who sit in on'' every board and committee meeting).
        \375\ See House Committee on Oversight and Government Reform,
    Transcript Statement of Chairman Towns, AIG: Where is the Taxpayer
    Money Going?, 111th Cong. (May 13, 2009) (stating ``I'm just thinking
    that if you are trustees of a company that has set a record in losses,
    it seems to me you should have something to say--should put something
    somewhere. I mean, if not, you should feel extremely guilty'' and also
    commenting that ``it's not clear to me and other members here exactly
    what you do in terms of your role that you're playing in this''); House
    Committee on Oversight and Government Reform, Transcript Statement of
    Representative Tierney, AIG: Where is the Taxpayer Money Going?, 111th
    Cong. (May 13, 2009).
    ---------------------------------------------------------------------------
        For its part, the GAO has noted that any trust raises some
    important efficiency and management concerns since the
    structure takes control of the investment out of the
    government's hands substantially and requires the trustees to
    ``develop their own mechanisms to monitor the investments and
    analyze the data needed to assess the financial condition of
    the institutions or companies and decide when to divest.''
    \376\
    ---------------------------------------------------------------------------
        \376\ U.S. Government Accountability Office, Troubled Asset Relief
    Program: Status of Government Assistance Provided to AIG, GAO-09-975,
    at 18 (September 2009) (online at www.gao.gov/new.items/d09975.pdf)
    (hereinafter ``GAO Report on AIG'').
    ---------------------------------------------------------------------------
        Additionally, tensions have arisen between AIG, trustees,
    and other government regulators, despite the existence of a
    trust.\377\ Recent press reports indicating that one of the AIG
    trustees was contemplating whether to resign suggest the
    potential conflicts between trustees and other government
    regulators (e.g., the special master for compensation) that can
    arise even when a trust structure is used.
    ---------------------------------------------------------------------------
        \377\ In recent weeks, AIG has seen the departures of some of its
    senior management, including its vice chairman for legal, human
    resources, corporate affairs, and corporate communications, and its
    chief compliance and regulatory officer. These employees resigned due
    to the reduction in base salary that was mandated by Special Master for
    Compensation Kenneth Feinberg.
    ---------------------------------------------------------------------------
                c. Analysis of Intended Exit Strategy
        Earlier this year, no real exit strategy was apparent with
    respect to AIG. At the Panel's hearing on April 21, 2009,
    Secretary Geithner was unable to explain clearly the
    Administration's exit strategy.\378\ Secretary Geithner could
    only point to the fact that the federal government ``came into
    this financial crisis without a legal framework that allowed it
    to intervene and manage more effectively the risk posed by
    institutions like AIG . . . We still do not have that authority
    today.''
    ---------------------------------------------------------------------------
        \378\ Congressional Oversight Panel, Testimony of Treasury
    Secretary Timothy F. Geithner (Apr. 21, 2009) (online at
    cop.senate.gov/documents/transcript-042109-geithner.pdf) (in response
    to question from Rep. Hensarling).
    ---------------------------------------------------------------------------
        While the legal framework necessary for proper resolution
    of a large failing financial institution still does not exist,
    improvements in market conditions have allowed Treasury to
    better articulate an exit strategy for AIG. Treasury's intent
    to balance taxpayer return, institutional stability and
    systemic stability, however, tips in favor of institutional and
    systemic stability, which at present are very much the same
    thing. Treasury believes that AIG still represents a
    significant systemic weakness and would be given non-investment
    credit ratings by the rating agencies without government
    support, and any exit strategy is constrained by that
    fact.\379\ Additionally, changing circumstances mean that
    Treasury's exit strategy has to be adjusted on a continuous
    basis. While the initial plan by the Federal Reserve and
    Treasury was to sell off certain divisions of AIG quickly,
    Treasury and the Federal Reserve indicated in their March
    announcement that deteriorating economic conditions (and the
    difficulty of obtaining reasonable prices) had interfered with
    that objective. Their goal became reducing the size of AIG by
    disposing of assets once the market improves.\380\ AIG has had
    mixed success in some of its restructuring plans, such as
    separating and strengthening core insurance businesses,
    divesting assets, reducing operating expenses, and winding down
    its exposure to certain financial products and derivatives
    trading activities in order to reduce risk. Given the
    complexity and extensiveness of AIG's restructuring, however,
    this is a process that will take several years.\381\ Even some
    critics of the AIG bailout recognize that the U.S. government
    cannot end its assistance to AIG anytime soon because of the
    size of its assistance as well as continued economic
    uncertainty.\382\
    ---------------------------------------------------------------------------
        \379\ Treasury conversations with Panel staff (Dec. 1, 2009).
        \380\ AIG Restructuring Plan Announcement, supra note 311;
    Participation in AIG Restructuring Plan Announcement, supra note 319.
        \381\ See AIG Reports Third Quarter 2009 Results, supra note 357
    (noting that AIG's wind-down has slowed as the company expects to
    accomplish its restructuring plan ``over a longer time frame than
    originally contemplated''); Treasury conversations with Panel staff
    (Dec. 3, 2009); Treasury conversations with Panel staff (Dec. 16,
    2009).
        \382\ Professor Charles Calomiris, Henry Kaufman Professor of
    Financial Institutions at Columbia Business School, made the following
    statement with respect to AIG on an NPR radio broadcast in March 2009:
    ``I've made most of my career talking about the dangers of rewarding
    failure in financial institutions. So it's especially ironic that I'm
    here on your program telling people that right now, that isn't the
    right answer. Yes, it doesn't feel very good, it creates bad
    incentives, too. . . . But right now, we have to also deal with what
    the cards that were dealt. And the cards that we're dealt is a
    financial system, the brain center of the economy, that's desperately
    in need of propping up. And if we don't prop it up, we're the ones who
    are going to not get credit. We're the ones who are going to suffer the
    consequences of a very depressed economy for a very long time. We're
    the ones who are going to lose our jobs, our homes and our retirement
    savings.'' Interview with Charles Calomiris, Talk of the Nation, NPR
    radio broadcast (Mar. 17, 2009) (online at www.npr.org/templates/
    transcript/transcript.php?storyId=102006900).
    ---------------------------------------------------------------------------
        With respect to timing, as with most TARP-related
    investments, the U.S. government has stated that it would like
    AIG to repay its federal assistance ``as soon as practicable''
    (and AIG has also indicated a desire to do so as soon as
    possible),\383\ but it seems likely that a complete disposition
    of Treasury's holdings in AIG will occur over several years,
    especially in light of the size of its stake as well as its
    objective to achieve ``full repayment'' of the government
    assistance that AIG has received.\384\ The Panel notes that the
    AIG intervention is somewhat unique in that it involves both
    Treasury and FRBNY, meaning that the actions of both Treasury
    and FRBNY have an impact on what the U.S. government holds and
    what steps might be taken in the future.
    ---------------------------------------------------------------------------
        \383\ AIG conversations with Panel staff (Dec. 11, 2009).
        \384\ Dudley Testimony before House Financial Services Committee,
    supra note 346, at 2. However, even Treasury believes that achieving
    this goal is doubtful, as its recently published financial statements
    show Treasury's estimate of the expected loss from TARP AIGIP
    investments in AIG. See Section D.6, infra.
    ---------------------------------------------------------------------------
        A ``buy-and-hold'' strategy, which appears to be the
    objective of Treasury and the Federal Reserve, has several
    advantages. First, a satisfactory return on collateralized debt
    obligations (CDOs) and residential mortgage-backed securities
    (RMBS) purchased by Maiden Lane II LLC and Maiden Lane III LLC
    will likely take time, given the current difficulties in
    obtaining reasonable prices for these types of assets.\385\
    Second, a long-term approach may increase AIG's ability to
    repay its obligations to the federal government as economic
    conditions continue to improve. ``The slower approach to
    restructuring could help AIG to generate more favorable values
    from its business portfolio than would be the case under rushed
    asset sales,'' Moody's Investors Service has noted.\386\ Third,
    Mr. Benmosche has cautioned that corporate earnings will likely
    remain subject to ``continued volatility'' as the company
    continues its restructuring process. In early March 2009, AIG
    announced a loss of $61.7 billion for the fourth quarter of
    2008, the largest quarterly corporate loss in U.S. history. AIG
    only recently posted a second consecutive quarterly profit.
    Since AIG continues to rely heavily on the federal government
    for liquidity and capital, it is still too early to know
    whether this recent trend in earnings will continue.
    ---------------------------------------------------------------------------
        \385\ The Federal Reserve Bank of New York stated that this equity
    interest ``has the potential to provide a substantial financial return
    to the American people should the $85 billion loan, as anticipated,
    provide AIG with the intended breathing room to execute a value-
    maximizing strategic plan.'' Federal Reserve Bank of New York,
    Statement by the Federal Reserve Bank of New York Regarding AIG
    Transaction (Sept. 29, 2008) (online at www.newyorkfed.org/newsevents/
    news/markets/2008/an080929.html).
        \386\ Moody's sees AIG holding its ground through 3Q09, supra note
    343.
    ---------------------------------------------------------------------------
        While Treasury might consider selling now and realizing a
    loss or pursuing an orderly liquidation of AIG's businesses
    outside the bankruptcy process, Treasury indicated that such
    options do not seem feasible or practical given the company's
    substantial connections to various parts of the insurance and
    financial products sectors.\387\ First, the value of the
    taxpayers' investment in AIG would be jeopardized substantially
    in a liquidation, since Treasury would receive little or no
    value on its preferred securities holdings; moreover, market
    confidence could be shaken by any such action by Treasury.\388\
    Second, Treasury discussed how it reached a mutual agreement
    with the Federal Reserve to assist AIG under a unique set of
    circumstances, largely due to the systemic risk concerns
    created by the company's substantial size and exposure to
    various sectors of the financial markets, including insurance
    and credit default swaps (CDS) and derivatives.\389\ In
    conversations with Panel staff, Treasury staff emphasized that
    its exit from AIG is constrained by the impact of credit rating
    agency downgrades, which would trigger the posting of
    additional collateral.\390\
    ---------------------------------------------------------------------------
        \387\ Treasury conversations with Panel staff (Dec. 16, 2009).
        \388\ Id.
        \389\ Id.; Treasury conversations with Panel staff (Dec. 3, 2009).
        \390\ AIG entered into credit-default swaps with counterparties who
    were authorized to require AIGFP to post collateral upon the occurrence
    of certain events relating to the underlying CDOs, including declines
    in market value as well as credit rating downgrades. Treasury
    conversations with Panel staff (Dec. 3, 2009). A significant portion of
    AIGFP's Guaranteed Investment Agreements (GIAs), structured financing
    arrangements and financial derivative transactions included provisions
    that required AIGFP, ``upon a downgrade of AIG's long-term debt
    ratings, to post collateral or, with the consent of the counterparties,
    assign or repay its positions or arrange a substitute guarantee of its
    obligations by an obligor with higher debt ratings.'' American
    International Group, 2008 Annual Report, Form 10-K, Item 7 (online at
    www.aigcorporate.com/
    investors/annualreports_proxy.html). In addition, certain downgrades of
    AIG's long-term senior debt ratings (resulting from various default
    events, including bankruptcy due to dissolution, insolvency,
    appointment of a conservator, etc.) would permit either AIG or the
    counterparties to elect early termination of contracts. See 1992 ISDA
    section 5. (Treasury confirmed that AIG had contracts with this type of
    wording.)
    ---------------------------------------------------------------------------
        While most of the initial focus in the AIG intervention was
    on the AIGFP transactions, Treasury points out that the
    intervention was also driven by the positions of AIG's
    insurance companies.\391\ Four major subsidiaries are
    consolidated with AIG. While each is functionally regulated by
    the states where it is licensed, and each state imposes its own
    capital requirements, Treasury noted that the subsidiaries'
    viability and performance are subject to the capacity to
    maintain investment-grade credit. To some, the notion that
    several insurance players could cause the system to be
    destabilized substantially seems unlikely, given that insurance
    underwriters and agencies have gotten into trouble many times
    before, and no major crisis has resulted. Panel staff pressed
    this issue with Treasury, and Treasury's response underscores
    how the entirety of its exit strategy with respect to AIG is
    based on the reaction of the credit rating agencies.\392\ In
    Treasury's view, if the government does anything to cause a
    substantial credit downgrade for the AIG parent, it would
    result in an unraveling of the business of its subsidiaries.
    AIG has made efforts to sell two of its insurance subsidiaries
    (American International Assurance Company Ltd. (AIA), and
    American Life Insurance Company (ALICO)) in order to create
    some independence from the parent and AIGFP.\393\ The credit
    rating agencies have indicated that if AIG were to sell off the
    remaining two insurance subsidiaries, such actions would
    substantially affect AIG's ongoing business and thereby trigger
    further downgrades,\394\ unless the proceeds of the sales would
    be sufficient to pay off all of the company's debt, which is
    not likely.\395\ While a downgrade of a parent does not
    necessarily result in the downgrade of a well-capitalized
    subsidiary, A.M. Best, a leading credit rating agency for the
    insurance industry, indicated to Treasury that if the parent is
    no longer rated investment grade, it would be very difficult to
    maintain an investment grade rating on a subsidiary.\396\ While
    policyholders would likely be protected in the event of a
    downgrade, Treasury noted that, given that there are 130
    million AIG life insurance policyholders, there would be
    significant interruption in the flow of insurance claim
    payments as a result of any such downgrade, at least for some
    time.\397\ This would result in a ``loss of confidence among
    policyholders,'' and a possible run in the insurance industry,
    similar to a bank run.\398\
    ---------------------------------------------------------------------------
        \391\ Treasury conversations with Panel staff (Dec. 16, 2009);
    Treasury conversations with Panel staff (Dec. 3, 2009).
        \392\ Treasury conversations with Panel staff (Jan. 5, 2010).
        \393\ Treasury conversations with Panel staff (Jan. 5, 2010). As
    discussed in Note 312, AIG recently decided to have a public stock
    offering for AIA on the Hong Kong stock exchange (which might raise as
    much as $20 billion).
        \394\ According to Treasury, such downgrades would also trigger the
    remaining AIGFP debt, resulting in the need to post more collateral as
    counterparties would terminate the Guaranteed Investment Agreements
    (GIAs), structured financing arrangements and financial derivative
    transactions.
        \395\ Treasury conversations with Panel staff (Jan. 5, 2010).
        \396\ Treasury conversations with Panel staff (Jan. 5, 2010).
        \397\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \398\ Agency Financial Statement 2009, supra note 32.
    ---------------------------------------------------------------------------
        Furthermore, AIG remains exposed to financial products,
    including over $1 trillion notional value of credit-default
    swaps and other derivatives, according to Treasury.\399\ As a
    result of this exposure, any credit rating downgrade would, in
    Treasury's view, cause serious destabilization and volatility
    in those markets, as counterparties liquidated their contracts
    and asserted their claims.\400\ Additionally, Treasury noted
    that such circumstances could result in real discontinuity in
    pricing, and not just among the counterparties.\401\ The Panel
    notes, however, that many of these contracts are partially
    canceling, so AIG's net notional exposure is much smaller than
    the notional value articulated by Treasury. According to the
    Depository Trust & Clearing Corporation, AIG's CDS gross
    notional outstanding and net notional outstanding were $82.4
    billion and $7.4 billion, respectively, as of December 31,
    2009.\402\ The gross notional outstanding represents the
    aggregate dollar value exposure on all CDS contracts. The net
    notional outstanding, however, represents the maximum funds
    that would be transferred on outstanding credit default swaps
    from net sellers to net buyers were a credit event to occur on
    December 31, 2009.
    ---------------------------------------------------------------------------
        \399\ Treasury conversations with Panel staff (Dec. 3, 2009);
    Treasury conversations with Panel staff (Dec. 16, 2009).
        \400\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \401\ Treasury conversations with Panel staff (Dec. 3, 2009).
        \402\ See The Depository Trust & Clearing Corporation, Trade
    Information Warehouse Credit Derivatives Data Report, Table 6: Top 1000
    Reference Entities (Gross and Net Notional) for the Week ending: 2010-
    01-01 (www.dtcc.com/products/derivserv/
    data_table_i.php?id=table6_current) (accessed Jan. 6, 2010). AIG's CDS
    notional outstanding figures include the CDS gross and net notional
    outstanding for American General Finance Corp. and International Lease
    Finance Corp., both of whom are subsidiaries of AIG Capital Corp., a
    subsidiary of AIG. The CDS securities for American General Finance
    Corp. and International Lease Finance Corp. trade under their own
    unique CDS tickers but are underneath the corporate AIG, Inc. umbrella
    and, therefore, represent CDS exposure for AIG, Inc. The CDS gross
    notional outstanding and net notional outstanding for these two
    subsidiaries comprise $38.3 billion and $3.5 billion of the total gross
    and net notional outstanding for AIG, Inc.
    ---------------------------------------------------------------------------
        In some ways, it is difficult to assess the progress that
    AIG itself is making towards restructuring because recent
    changes in senior management have altered the company's
    direction. The Economist has characterized AIG's strategy as
    ``oscillat[ing] between retrenchment and rebirth, depending on
    who is in charge on any given day.'' \403\ Based upon the
    available information, however, it seems that AIG's revised
    restructuring strategy, as articulated by Mr. Benmosche, has
    resulted in some progress in the company's path toward
    stabilizing and repaying at least part of its government
    assistance. In his recent testimony before the Panel, Secretary
    Geithner discussed how the company's new board and management
    are ``working very hard and effectively'' at strengthening
    AIG's core insurance business while reducing the AIGFP
    portfolio.\404\
    ---------------------------------------------------------------------------
        \403\ The Living Dead, The Economist (Nov. 5, 2009) (online at
    www.economist.com/opinion/displaystory.cfm?story_id=14803171) (arguing
    that AIG is the ``biggest financial zombie of all'').
        \404\ Agency Financial Statement 2009, supra note 32.

                                                        FIGURE 12: NET INCOME/(LOSS) ATTRIBUTABLE TO AIG
                                                                      [Dollars in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Q1 2008      Q2 2008      Q3 2008      Q4 2008      Q1 2009      Q2 2009      Q3 2009
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Net Income/(Loss)............................................     $(7,805)     $(5,357)    $(24,468)    $(61,659)     $(4,353)       $1,822         $455
    --------------------------------------------------------------------------------------------------------------------------------------------------------

        As noted above and shown in Figure 12, AIG has now posted
    two consecutive quarterly profits. These earnings results
    prompted Moody's to maintain its credit ratings on AIG in early
    November 2009 after concluding that the company should be able
    to repay its Federal Reserve loans and ``much or all'' of
    Treasury's TARP investments if financial markets continue to
    stabilize.\405\ In discussing the profits, AIG management
    highlights the company's retention of existing customers as
    well as its ability to attract new customers.\406\ Through
    October 31, 2009, AIG had entered into agreements to sell or
    complete the sale of operations and assets that are expected to
    generate roughly $5.6 billion in proceeds that will, upon
    closing, be used to repay outstanding borrowings and reduce the
    amount of the FRBNY revolving credit facility.\407\ There are
    also some indications that AIG has garnered success in selling
    fixed annuities to bank customers and that more insurance
    customers are keeping their policies with AIG, both of which
    might provide some positive news for the company's future. On
    the other hand, the Panel cannot determine if this is due to
    good business practices, or simply a result of government
    involvement. This uncertainty emphasizes once again the
    difficulty the U.S. government faces in backing out of this
    involvement.
    ---------------------------------------------------------------------------
        \405\ See Moody's sees AIG holding its ground through 3Q09, supra
    note 343.
        \406\ AIG conversations with Panel staff (Dec. 11, 2009).
        \407\ AIG Reports Third Quarter 2009 Results, supra note 357;
    American International Group, SEC Form 10-Q, Third Quarter 2009 (online
    at www.aigcorporate.com/investors/2009_November/
    2517447_17501T04_CNB.pdf) (hereinafter ``AIG SEC Form 10-Q'').
    ---------------------------------------------------------------------------
        The Panel notes, however, that it is still too early to
    reach conclusions about the effectiveness of AIG's
    restructuring, and that the company continues to face steep
    obstacles in its restructuring efforts and path toward
    profitability. AIG's restructuring plan still relies heavily on
    government assistance, and it will take more than two
    profitable earnings quarters for the company to stabilize and
    be able to repay the entirety of its government support. As the
    GAO noted recently, ``[t]he sustainability of any positive
    trends of AIG's operations and repayment efforts is not yet
    clear. The government's ability to recoup the federal
    assistance money depends on the ``long-term health of AIG, its
    sales of certain businesses, and the maturation or sales of
    assets in the Maiden Lanes, among other factors.'' \408\ In a
    recent interview, Mr. Benmosche stated that the company remains
    too large and unwieldy. ``I feel strongly that AIG is too big
    today--it is extremely complex to manage and we need to make
    sure it's more transparent, that it's smaller, and that we can
    make it on our own,'' he said.\409\ As noted above, AIG has
    made some preliminary progress with respect to its commitment
    to split off two sizeable foreign life insurance units, which
    it said previously would be broken off before the end of 2009.
    AIG's assets, many of which are derivative contracts tied to
    mortgage debt, could again lose value, or the company could be
    forced to take losses as it sells them off. Another issue of
    some concern is AIG's ability to refinance debt obligations as
    they come due in coming years. The AIG parent company and two
    of its business units face significant maturities in the near
    term,\410\ and whether AIG has the capacity to refinance these
    debt obligations remains to be seen. As it writes down the
    value of sold-off assets, AIG's ability to achieve a long run
    of profitable quarters will be impacted. For example, as a
    result of its recently completed debt-for-equity swap involving
    its two life insurance subsidiaries with FRBNY, AIG will take a
    $5.7 billion restructuring charge in the fourth quarter of
    2009, which will likely offset any profits AIG has made in this
    same period. It is also unclear at this time whether and to
    what extent AIG will be able to access the capital markets, a
    necessary step before it can repay its AIGIP/SSFI assistance,
    and whether AIG will be able to maintain its single ``A''
    credit rating or face further downgrades. In addition, much of
    the recent improvement in AIG's financial condition can be
    reasonably attributed to the substantial Treasury and Federal
    Reserve assistance that AIG has received since late 2008.\411\
    ---------------------------------------------------------------------------
        \408\ GAO Report on AIG, supra note 376, at 51.
        \409\ Serena Ng, AIG Chief: Key Staff Suffer Financially, Wall
    Street Journal (Dec. 15, 2009) (online at online.wsj.com/article/
    SB10001424052748703954904574596501071391332.html).
        \410\ American International Group, 2008 Annual Report, Form 10-K,
    at 274-75 (online at phx.corporate-ir.net/External.File?item=
    UGFyZW50SUQ9Mjg0NHxDaGlsZElEPS0xfFR5cGU9Mw==&t=1) (detailing aggregate
    annual maturities of long-term debt obligations (based on final
    maturity dates); AIG conversations with Panel staff (Dec. 16, 2009).
        \411\ See Moody's sees AIG holding its ground through 3Q09, supra
    note 343; AIG shows signs of stabilization but risks remain, supra note
    343 (noting that the U.S. government has continued to serve as AIG's
    primary liquidity and capital source and that the ``restructuring plan
    still relies heavily on government support.'' In addition, Moody's
    Investors Service emphasizes that its current ratings on AIG ``reflect
    [its] understanding that the government is committed to working with
    the firm to maintain its ability to meet obligations as they come due
    throughout the restructuring process''); see also GAO Report on AIG,
    supra note 376, at 43-51.
    ---------------------------------------------------------------------------
        The most troublesome part of AIG remains AIGFP.\412\ As of
    September 30, 2009, the notional amount of the AIGFP
    derivatives portfolio had been reduced by 28 percent from
    December 2008, with a 13 percent reduction in the third quarter
    of 2009 alone, but Maiden Lane III had not eliminated AIGFP's
    exposure to credit default swaps.\413\ In discussions with
    Panel staff, Treasury expressed confidence that the entire
    AIGFP will be unwound by the end of 2010.\414\ However, a
    recent AIG filing with the SEC suggests that it remains unclear
    whether AIG will need to post additional collateral if credit
    markets experience continued deterioration and, hence, whether
    it will be exposed to further losses as well as risks for a
    much longer period of time.\415\ Given the continued economic
    uncertainty, AIGFP is unable to predict accurately when it will
    be able to retire its credit default swap portfolio in full.
    ---------------------------------------------------------------------------
        \412\ The Panel notes that SIGTARP issued a recent audit discussing
    the government's intervention in AIG and the controversy over AIG
    counterparty payments and why they were paid at par value. See SIGTARP,
    Audit: Factors Affecting Efforts to Limit Payments to AIG
    Counterparties, at 25 (Nov. 17, 2009) (online at www.sigtarp.gov/
    reports/audit/2009/
    Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf).
        \413\ See AIG Reports Third Quarter 2009 Results, supra note 357;
    see also AIG SEC Form 10-Q, supra note 407.
        \414\ Treasury conversations with Panel staff (Dec. 16, 2009);
    Allison Testimony before House Oversight and Government Reform
    Committee, supra note 118, at 11.
        \415\ See AIG SEC Form 10-Q, supra note 407.
    ---------------------------------------------------------------------------
        The Panel notes the steps the government has taken to
    address AIG's systemic risk concerns and prevent it from facing
    imminent collapse again, including a significant amount of
    information sharing between Treasury and FRBNY personnel with
    respect to the monitoring of AIG's restructuring process.\416\
    These steps by themselves do not mean, however, that the
    government's exit will come quickly or that the decision to
    intervene in AIG will prove to be a profitable one. As
    discussed above, there are significant obstacles to the
    company's restructuring process, and Treasury's most recent
    estimates are that some significant portion of those funds will
    never be recovered.\417\ Treasury appears not, however, to have
    been seeking to maximize profits in this intervention.\418\
    ---------------------------------------------------------------------------
        \416\ Treasury conversations with Panel staff (Dec. 16, 2009).
        \417\ In its recently issued TARP financial statements for the year
    ended September 30, 2009, Treasury noted that the prospect for full
    repayment from the AIGP is doubtful. Unlike its banking investments,
    for which it expects to make money, Treasury does not have the same
    level of confidence with respect to its efforts to stabilize AIG. As of
    September 30, 2009, Treasury reports that AIGIP will result in a net
    cost to the taxpayers of $30.427 billion. As Secretary Geithner stated
    in his recent testimony before the Panel, ``[t]here is a significant
    likelihood we will not be repaid from our investments in AIG.'' COP
    December Geithner Hearing Transcript, supra note 210. Assistant
    Secretary Allison confirmed the likelihood of losses on AIG, ``[b]ased
    on current valuations,'' in his recent testimony before the House
    Oversight and Government Reform Committee. Allison Testimony
    Transcript, supra note 135.
        \418\ Treasury conversations with Panel staff (Dec. 16, 2009).
    ---------------------------------------------------------------------------
        Treasury and the Federal Reserve have taken extraordinary
    steps to keep AIG from facing bankruptcy. As discussed above,
    the government's exit strategy has to be adjusted on a
    continuous basis due to changing circumstances, meaning that
    AIG's restructuring is an iterative process. While neither AIG
    management nor Treasury believes that additional assistance is
    necessary at this time, Treasury and FRBNY continue to monitor
    the company's restructuring process and financial condition
    closely.\419\ Treasury remains cognizant of the fact, however,
    that it will be difficult for the company ``to prosper under
    [the U.S. government's] majority ownership,'' and Treasury
    expressed the view that the U.S. government would rather make
    an orderly exit out of AIG ``than [make] a lot of money on
    it.'' \420\
    ---------------------------------------------------------------------------
        \419\ Treasury conversations with Panel staff (Dec. 16, 2009); AIG
    conversations with Panel staff (Dec. 11, 2009); Allison Testimony
    Transcript, supra note 135 (noting that Treasury ``believe[s] that the
    investments [it] made should be adequate'').
        \420\ Treasury conversations with Panel staff (Dec. 16, 2009); see
    also Allison Testimony Transcript, supra note 135 (noting that ``[t]he
    TARP investments were not made to make money but to help avert a
    collapse of our financial system'').
    ---------------------------------------------------------------------------

    7. Chrysler and GM

                a. Acquisition of Assets and Current Value
        The government's holdings in Chrysler and General Motors
    (GM) derive from a sequence of events that started in late
    2008, described more fully in the Panel's September
    report.\421\ Facing a crippling lack of access to the credit
    markets due to the global financial crisis, Chrysler and GM
    appealed to Congress for assistance. The government eventually
    provided assistance under a new TARP initiative, the Automobile
    Industry Financing Program (AIFP). Chrysler and GM received
    bridge loans of $4 billion and $19.4 billion,\422\
    respectively.\423\
    ---------------------------------------------------------------------------
        \421\ See COP September Oversight Report supra note 108, at 7-23.
        \422\ Treasury invested an initial amount of $13.4 billion in
    December 2008, and had loaned an additional $6 billion to GM by June
    2009. See Agency Financial Statement 2009, supra note 32, at 34.
        \423\ For the terms of the loans, see generally U.S. Department of
    the Treasury, Loan and Security Agreement [GM] (Dec. 31, 2008) (online
    at www.financialstability.gov/docs/agreements/
    GM%20Agreement%20Dated%2031%20December%202008.pdf) (hereinafter ``Loan
    and Security Agreement [GM]''); U.S. Department of the Treasury, Loan
    and Security Agreement [Chrysler] (Dec. 31, 2008) (online at
    www.financialstability.gov/docs/agreements/Chysler_12312008.pdf)
    (hereinafter ``Loan and Security Agreement [Chrysler]'').
    ---------------------------------------------------------------------------
        The loans were extended to Chrysler and GM under terms and
    conditions specified in separate loan and security agreements.
    Under the initial agreements, the Bush Administration required
    each company to demonstrate its ability to achieve ``financial
    viability,'' which was defined as ``positive net value, taking
    into account all current and future costs,'' and the ability to
    ``fully repay the government loan.'' \424\ In February 2009,
    both companies submitted plans for achieving financial
    viability, which were reviewed by officials in the
    Administration.
    ---------------------------------------------------------------------------
        \424\ White House, Fact Sheet: Financing Assistance to Facilitate
    the Restructuring of Auto Manufacturers to Attain Financial Viability
    (Dec. 19, 2008) (online at georgewbush-whitehouse.archives.gov/news/
    releases/2008/12/20081219-6.html). The loans also imposed conditions
    related to operations, expenditures, and reporting.
    ---------------------------------------------------------------------------
        The Administration concluded that Chrysler could not
    achieve viability as a stand-alone company and that it would
    have to develop a partnership with another automotive company
    or face bankruptcy.\425\ The Administration concluded that GM's
    financial viability plan relied on overly optimistic
    assumptions about the company and future economic
    developments.\426\
    ---------------------------------------------------------------------------
        \425\ U.S. Department of the Treasury, Chrysler February 17 Plan:
    Determination of Viability, at 1 (Mar. 30, 2009) (online at
    www.financialstability.gov/docs/AIFP/Chrysler-Viability-
    Assessment.pdf).
        \426\ U.S. Department of the Treasury, GM February 17 Plan:
    Determination of Viability, at 1 (Mar. 30, 2009) (online at
    www.financialstability.gov/docs/AIFP/GM-Viability-Assessment.pdf).
    ---------------------------------------------------------------------------
        Ultimately, both companies entered bankruptcy and, with
    debtor-in-possession financing provided by the federal
    government,\427\ underwent significant restructuring. In the GM
    bankruptcy, some of the debt owed to the U.S. government was
    converted into equity. All told, U.S. taxpayers expended $49.9
    billion of TARP funds in conjunction with GM's bankruptcy and
    the subsequent creation of what is called New GM.\428\ The
    Chrysler transactions expended $12.8 billion of TARP funding.
    Today, the U.S. government owns:
    ---------------------------------------------------------------------------
        \427\ Treasury provided a total of $8.5 billion in working capital
    and exit financing to facilitate Chrysler's Chapter 11 restructuring.
    U.S. Department of the Treasury, AIFP Outlays for COP (Aug. 18, 2009).
    It provided a total of approximately $30.1 billion of financing to
    support GM's Chapter 11 restructuring. See also Allison Testimony
    before House Oversight and Government Reform Committee, supra note 118,
    at 4.
        \428\ COP September Oversight Report, supra note 108, at 54.
    ---------------------------------------------------------------------------
               10 percent of the common equity of Chrysler;
               $7.1 billion in debt securities of Chrysler;
            \429\
    ---------------------------------------------------------------------------
        \429\ The $7.1 billion debt security consists of a $6.6 billion new
    commitment and $0.5 billion in assumed debt. As of December 31, 2009,
    Chrysler has drawn approximately $4.6 billion. See Agency Financial
    Statement 2009, supra note 32, at 35.
    ---------------------------------------------------------------------------
               60.8 percent of the common equity of GM;
               $5.7 billion in debt securities of GM; \430\
            and
    ---------------------------------------------------------------------------
        \430\ As of December 31, 2009, the outstanding principal balance is
    $5.7 billion. See Agency Financial Statement 2009, supra note 32, at
    34; see also U.S. Department of the Treasury, Treasury Receives First
    Quarterly Repayment from General Motors (Dec. 18, 2009) (online at
    treasury.gov/press/releases/tg456.htm) (hereinafter ``Treasury Receives
    First Quarterly Repayment from GM'').
    ---------------------------------------------------------------------------
               $2.1 billion in GM preferred stock, paying a
            dividend of nine percent.\431\
    ---------------------------------------------------------------------------
        \431\ Agency Financial Statement 2009, supra note 32, at 34-35; see
    also Allison Testimony before House Oversight and Government Reform
    Committee, supra note 118, at 5.
    ---------------------------------------------------------------------------
        The following table shows the government's current holdings
    and the amounts expended to acquire those holdings:

                                 FIGURE 13: GOVERNMENT HOLDINGS IN CHRYSLER AND GM \432\
    ----------------------------------------------------------------------------------------------------------------
                                               Number/Principal                               Aggregate Value  as of
                    Asset                        Amount \433\           Acquisition Cost             9/30/09
    ----------------------------------------------------------------------------------------------------------------
    Chrysler:
        Common Stock (Class A)...........             \434\ 96,461  .......................  .......................
        Floating Rate Notes..............     \435\ $7,142,000,000  .......................  .......................
            Total........................  .......................    \436\ $12,810,284,222  .......................
    ----------------------------------------------------------------------------------------------------------------
    GM:
        Preferred Stock..................    \434\ \437\ 3,898,305  .......................  .......................
        Common Stock.....................  \434\ \438\ 304,131,356  .......................  .......................
        Floating Rate Notes..............           $5,711,864,407  .......................  .......................
            Total........................  .......................    \439\ $49,860,624,198  .......................
                Total for All Assets.....  .......................  .......................    \440\ 42,300,000,000
    ----------------------------------------------------------------------------------------------------------------
    \432\ In December 2009, SIGTARP released a report on the use of TARP funds for GM, Chrysler, GMAC, Chrysler
      Financial Services, the Hartford Financial Services Group and Lincoln National Corporation. According to the
      report, GM used the $49.5 billion it received to pay operating costs, aid in the wind-down of old GM, settle
      derivative positions, fund foreign subsidiaries, and provide a loan to GM Canada. By November 18, 2009,
      Chrysler had used $10.5 billion of the total $12.5 billion in Treasury funds, primarily for operating costs.
      See SIGTARP, Additional Insight on Use of Troubled Asset Relief Program Funds, at 5-6 (Dec. 10, 2009) (online
      at www.sigtarp.gov/reports/audit/2009/Additional_Insight_on_Use_of_Troubled_Asset_Relief_Program_Funds.pdf).
      In addition, also in December 2009, the OFS released the Agency Financial Report for the year ending September
      30, 2009. The report discusses the automotive industry financing program and associated programs, as well as
      the valuation methodology that OFS uses to account for the investments. See Agency Financial Statement 2009,
      supra note 32, at 33-36 and 53.
    \433\ This table only lists the government's holdings in Chrysler Group LLC and General Motors Holdings LLC, the
      ``new'' car companies as detailed in the Panel's September report. See COP September Oversight Report, supra
      note 108, at 60-63. The government also holds claims in Chrysler Holding LLC and Motors Liquidation Company,
      the ``old'' car companies, which are currently in the process of being liquidated in bankruptcy. See TARP
      Transactions Report for Period Ending December 30, 2009, supra note 166. These claims will be administered by
      the bankruptcy court and it is unlikely that the government will be repaid. See COP September Oversight
      Report, supra note 108.
    \434\ Treasury conversations with Panel Staff (Dec. 3, 2009). This number represents numbers of shares of stock,
      rather than dollar values.
    \435\ The $7.1 billion amount consists of a $6.6 billion new commitment and $0.5 billion in assumed debt. As of
      December 31, 2009, Chrysler has drawn approximately $4.6 billion. See Agency Financial Statement 2009, supra
      note 32, at 35.
    \436\ This figure represents the total amount of funds provided to Chrysler through the AIFP. It does not
      reflect the $280 million repayment made by Chrysler on July 10, 2009 or the $2.4 billion in Treasury
      commitments to Chrysler that were unused and de-obligated. See COP September Oversight Report, supra note 108,
      at 60.
    \437\ Treasury conversations with Panel Staff (Dec. 3, 2009). This number represents numbers of shares of stock,
      rather than dollar values.
    \438\ Treasury conversations with Panel Staff (Dec. 3, 2009).
    \439\ This figure represents the total amount of funds provided to General Motors through the AIFP. It does not
      reflect the $361 million repayment made by GM on July 10, 2009, or the $1 billion repayment made in December
      2009. See COP September Oversight Report, supra note 108, at 62-63; see also Treasury Receives First Quarterly
      Repayment from GM, supra note 430.
    \440\ Agency Financial Statement 2009, supra note 32, at 17.

        Treasury's holdings in the automotive companies cannot be
    ascribed a definitive value. As an initial matter, following
    bankruptcy proceedings, the ``good'' assets in GM and Chrysler
    are now held by private companies, sometimes referred to as New
    GM and New Chrysler, and there is at present no market for
    either the common or the preferred shares. Accordingly, there
    is no trading data on which to base a valuation. The companies
    are reorganizing their varying properties--intellectual,
    physical, and human capital--increasing the uncertainty of
    valuation. Further, in addition to the difficulty in valuing
    the shares of private companies (much less those in such flux
    as GM and Chrysler), valuation incorporates many assumptions,
    such as market risk and projected cash flows. Experts will use
    different methodologies and professional judgment to formulate
    these assumptions and, thus, their results may vary. The TARP
    financial statements reflect expected losses of $30.4 billion
    from GM and Chrysler as of September 30, 2009.\441\ Office of
    Management and Budget (OMB) and Congressional Budget Office
    (CBO) valuations of the taxpayer subsidy rate in automotive
    industry have produced varying results.\442\ Nevertheless, both
    OMB's and CBO's subsidy estimates imply there is a high
    likelihood the initial TARP financing to GM and Chrysler will
    not be repaid.\443\
    ---------------------------------------------------------------------------
        \441\ See Agency Financial Statement 2009, supra note 32, at 18.
        \442\ The OMB calculated separate subsidy rates for TARP investment
    debt and equity transactions at 49 percent and 65 percent,
    respectively, while the CBO estimated an aggregate credit subsidy rate
    for all TARP automotive industry support programs of 73 percent. See
    COP September Oversight Report, supra note 108, at 55-56. See generally
    Office of Management and Budget, The President's Budget for Fiscal Year
    2010, at 983 (May 2009) (online at www.whitehouse.gov/omb/budget/
    fy2010/assets/tre.pdf); Congressional Budget Office, The Troubled Asset
    Relief Program: Report on Transactions Through June 17, 2009 (June
    2009) (online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
        \443\ See COP September Oversight Report, supra note 108, at 55-56.
    ---------------------------------------------------------------------------
                b. Disposal of Assets and Recovery of Expended Amounts
        As discussed above, it is unlikely that the taxpayers will
    recover the whole of their TARP expenditure in the automobile
    companies.\444\ The money that can be recovered will come in
    two forms. First, both companies are indebted to the
    government. They must make enough money to pay principal and
    interest on that debt. Second, the government owns equity in
    both companies. Treasury must sell that equity in order to
    realize the taxpayers' investment. Repaying the debt merely
    depends on the company staying solvent long enough to make
    payments. Getting a return on equity investment depends on the
    company actually doing well enough for its stock price to
    increase: that is more directly linked to good corporate
    strategies. The companies' strategies are, therefore, discussed
    below in the context of the equity investment.
    ---------------------------------------------------------------------------
        \444\ Further, in recent testimony, Assistant Secretary for
    Financial Stability Herbert Allison stated that the losses from the
    disbursements to AIG and the auto companies were likely to be $60
    billion. See Allison Testimony Transcript, supra note 135.
    ---------------------------------------------------------------------------
                i. Debt
        The complex events leading to Treasury's loans to GM and
    Chrysler have resulted in a variety of debts outstanding, with
    different borrowers, terms, and maturity periods.\445\ The
    initial loan and securities agreements between Treasury and Old
    GM and Treasury and Old Chrysler have substantially similar
    terms.\446\ Each agreement stipulates that the respective
    company may obtain financing from time to time, on an as-needed
    basis, and sets forth a process for each company to request
    such funding. For both Old Chrysler and Old GM, Treasury loans
    made under the applicable agreements accrue interest at the
    London Interbank Offered Rate (LIBOR) plus 3 percent,\447\
    subject to increase upon nonpayment or default to the ordinary
    interest rate plus another 5 percent.\448\ These loans are
    secured by a lien on and security interest in all the
    respective company's assets, including, for example, cash and
    cash equivalents, intellectual property rights and its
    corresponding royalties, and all other tangible and intangible
    property.\449\ Subsequent credit agreements between Treasury
    and GM and Treasury and Chrysler provide for an interest rate
    that resets each quarter to the greater of three-month LIBOR or
    the floor (2 percent), plus a percentage that differs depending
    on the company and, in Chrysler's case, the tranche involved.
    The interest rates may be determined by reference to a variety
    of interest rate markers and provide for an increased rate in
    the event of default.\450\
    ---------------------------------------------------------------------------
        \445\ See generally U.S. Department of the Treasury, Auto Industry
    Financing Program (online at www.financialstability.gov/
    roadtostability/autoprogram.html) (updated Jan. 7, 2010).
        \446\ See generally Loan and Security Agreement [Chrysler], supra
    note 423.
        \447\ U.S. Department of the Treasury, Warrant Agreement Between
    General Motors Corporation and the U.S. Department of the Treasury,
    Appendix A, at 1-5 (Dec. 2008) (online at www.financialstability.gov/
    docs/ContractsAgreements/GMagreement.pdf) (hereinafter ``Warrant
    Agreement Between GM and Treasury''); Loan and Security Agreement
    [Chrysler], supra note 423, at Appendix A. By way of comparison, in
    October 2008, the Prime Rate (the rate at which banks make short term-
    loans to businesses) was 4.56 percent, while the one-month LIBOR was
    2.58 percent at the end of October 2008, and had been 3.24 percent a
    week earlier. See Board of Governors of the Federal Reserve System,
    Bank Prime Loan (Frequency: Monthly) (online at www.federalreserve.gov/
    Releases/H15/data/Monthly/H15_PRIME_NA.txt) (accessed Jan. 4, 2010);
    Market Data Center, Money Rates, Wall Street Journal (Oct. 31, 2008)
    (online at
    online.wsj.com/mdc/public/page/2_3020-moneyrate-
    20081031.html?mod=mdc_pastcalendar). It is difficult, however, to
    evaluate the rates given to the automobile companies against other
    loans given the extraordinary nature of the circumstances and the
    credit crunch.
        \448\ Warrant Agreement Between GM and Treasury, supra note 447, at
    17; Loan and Security Agreement [Chrysler], supra note 423, at 17.
        \449\ Warrant Agreement Between GM and Treasury, supra note 447, at
    29-30; Loan and Security Agreement [Chrysler], supra note 423, at 29-
    30.
        \450\ Specifically, the interest rate may switch from the three-
    month Eurodollar Rate to the Alternate Base Rate (the higher of the
    Prime Rate announced by JPMorgan Chase Bank or the federal funds rate
    plus 50 basis points). In an event of default, the interest rate for
    both companies resets to the then-applicable interest rate plus 2
    percent. See U.S. Department of the Treasury, Second Amended and
    Restated Secured Credit Agreement among General Motors Co., the
    Guarantors, and the United States Department of the Treasury, at
    section 2 (Aug. 12, 2009) (online at www.financialstability.gov/docs/
    AIFP/Binder1%20Second%20AR%20Credit
    %20Agreement%20and%201-4%20Amendments%2011-23-09.pdf) (hereinafter
    ``Second Amended and Restated Credit Agreement''); First Lien Credit
    Agreement among New Carco Acquisition LLC and the Lenders Party Thereto
    Dated as of June 10, 2009, at section 2 (online at
    www.financialstability.gov/docs/AIFP/
    4.%20Newco%20Credit%20Agreement.PDF). See also COP September Oversight
    Report, supra note 108, at 66.
    ---------------------------------------------------------------------------
        Absent an event of default, GM's loans mature on July 10,
    2015.\451\ The credit agreement between Treasury and GM
    provides for quarterly mandatory prepayments of $1 billion from
    existing escrow amounts in addition to the obligation for such
    funds to be applied to repay the loan by June 30, 2010, unless
    extended. Absent an event of default, a portion of Chrysler's
    loans mature in December 2011, with the balance becoming due in
    June 2017.\452\ However, in the event of default, any loans to
    either GM or Chrysler would become immediately due and
    payable.\453\ Treasury may transfer any or all of its rights
    under the debt instruments at any time. Chrysler and GM,
    however, may only transfer their rights and obligations with
    the prior written consent of Treasury.\454\
    ---------------------------------------------------------------------------
        \451\ See Second Amended and Restated Credit Agreement, supra note
    450, at section 2. The original loans to Old GM mature on December 30,
    2011. See Warrant Agreement Between GM and Treasury, supra note 447, at
    1.
        \452\ See Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 12.
        \453\ See Warrant Agreement Between GM and Treasury, supra note
    447, at 2.
        \454\ See Warrant Agreement Between GM and Treasury, supra note
    447, at 66; Loan and Security Agreement [Chrysler], supra note 423.
    ---------------------------------------------------------------------------
        In testimony before the Panel in July, Senior Advisor to
    the Secretary of the Treasury Ron Bloom, now also senior
    counselor on manufacturing policy,\455\ expressed reservations
    about the likelihood of taxpayers recouping the entirety of
    their investment in Chrysler and GM: ``[U]nder certain
    assumptions, GM may be able to pay off a high percentage of the
    total funds advanced by the taxpayers. Less optimistic, and in
    Treasury's view more likely, scenarios involve a reasonable
    probability of repayment of substantially all of the government
    funding for new GM and new Chrysler, and much lower recoveries
    for the initial loans.'' \456\ As of the end of 2009, Treasury
    has stated that it does not believe that there has been any
    material change to this assumption.
    ---------------------------------------------------------------------------
        \455\ White House, President Obama Names Ron Bloom Senior Counselor
    for Manufacturing Policy (Sept. 7, 2009) (online at www.whitehouse.gov/
    the_press_office/President-Obama-Names-Ron-Bloom-Senior-Counselor-for-
    Manufacturing-Policy/).
        \456\ Congressional Oversight Panel, Transcript Testimony of Ron
    Bloom, Senior Advisor to the Secretary of the Treasury and Senior
    Counselor on Manufacturing Policy, Field Hearing: Oversight of TARP
    Assistance to the Automobile Industry, 111th Cong. (July 27, 2009)
    (online at cop.senate.gov/documents/transcript-072709-
    detroithearing.pdf ) (hereinafter ``Ron Bloom Transcript Testimony'').
    ---------------------------------------------------------------------------
        For its part, Chrysler has expressed confidence that it
    will ``make good on the public's investment as the economy
    begins to recover and financing becomes available to dealers
    and consumers.'' As Jan Bertsch, a senior vice president of
    Chrysler, explained in her testimony at the Panel's July
    hearing: ``Our debt to the U.S. Treasury is due in several
    different tranches. One would be in 2011, again in 2016, and
    2017. Our goal would definitely be, if possible, to pay that
    back early. Part of the reason is the interest cost to the
    company is not immaterial, and so based on the interest rates
    that we are paying, I think that it would be one of our
    definite goals to pay that back early. But we see no issue in
    paying it back on time, certainly.'' \457\
    ---------------------------------------------------------------------------
        \457\ Congressional Oversight Panel, Transcript Testimony of Jan
    Bertsch, Chrysler Senior Vice President and Treasurer, Field Hearing:
    Oversight of TARP Assistance to the Automobile Industry, 111th Cong.,
    at 82 (July 27, 2009).
    ---------------------------------------------------------------------------
        On December 1, 2009, GM replaced then-CEO Fritz Henderson
    with Edward Whitacre,\458\ who has since said that GM is
    considering repaying the (now) $5.7 billion it owes the
    government under the secured notes through a lump-sum
    payment,\459\ and has stated that GM will repay by June
    2010.\460\ It should be noted, however, that GM is not yet
    making any profits, and the payment will come from an escrow
    account established as part of the bankruptcy
    reorganization,\461\ so that GM could not, strictly speaking,
    be said to be earning money to pay the taxpayer.\462\
    ---------------------------------------------------------------------------
        \458\ See General Motors, Statement Attributed to Chairman Ed
    Whitacre (Dec. 1, 2009) (online at media.gm.com/content/media/us/en/
    news/news_detail.brand_gm.html/content/Pages/news/us/en/2009/Dec/
    1201_GM_Fritz).
        \459\ See General Motors, GM CEO and Chairman Ed Whitacre: GM
    Leaders Expected to Show Quick Results (Dec. 9, 2009) (online at
    media.gm.com/content/media/us/en/news/news_detail.brand_gm.html/
    content/Pages/news/us/en/2009/Dec/1209_webchat). GM has since repaid $1
    billion of the sums outstanding. See Treasury Receives First Quarterly
    Repayment from GM, supra note 430.
        \460\ See General Motors, Statement Attributed to Chairman and
    Chief Executive Officer Ed Whitacre (Dec. 18, 2009) (online at
    media.gm.com/content/media/us/en/news/news_detail.brand_gm.html/
    content/Pages/news/us/en/2009/Dec/1218_repayment).
        \461\ Proceeds in the amount of $16.4 billion from the $30.1
    billion debtor-in-possession facility were deposited in escrow and will
    be distributed to GM at its request if the following conditions are
    met: (1) the representations and warranties GM made in the loan
    documents are true and correct in all material respects on the date of
    the request; (2) GM is not in default on the date of the request taking
    into consideration the amount of the withdrawal request; and (3) the
    United States Department of the Treasury (UST), in its sole discretion,
    approves the amount and intended use of the requested disbursement.
    U.S. Securities and Exchange Commission, General Motors Co. Form 8-K
    (Sept. 2, 2009) (online at www.sec.gov/Archives/edgar/data/1467858/
    000119312509220534/0001193125-09-220534-index.htm) (hereinafter
    ``General Motors Co. Form 8-K'').
        \462\ General Motors Co. Form 8-K, supra note 461; Allison
    Testimony before House Oversight and Government Reform Committee, supra
    note 118, at 12. In December, 2009, GM made the first of its quarterly
    payments to Treasury. See Treasury Receives First Quarterly Repayment
    from GM, supra note 430.
    ---------------------------------------------------------------------------
                ii. Equity
        The Treasury auto team expects that both companies will
    eventually access the equity capital markets through IPOs,\463\
    and as a result, successful IPOs will form the basis for the
    recovery of the taxpayers' money. This strategy hinges directly
    on the ability of the two companies to restructure and become
    profitable. At the moment, in a still-constrained credit
    market, and with the two companies facing pressure to rebuild
    themselves and under the perceived threat of political
    interference,\464\ it is unclear whether either company in its
    current form could access the banks or the capital markets in
    the amounts and on the terms that they would require. Since the
    public offering of these companies is the primary method for
    recovery of taxpayers' money, delays in or hindrances to
    accessing the capital markets will prolong Treasury's
    involvement as a shareholder, leading to greater uncertainty,
    both for the companies and for Treasury.
    ---------------------------------------------------------------------------
        \463\ See COP September Oversight Report, supra note 108, at 68-70.
    Chrysler and GM will require initial public offerings in order to
    become publicly-traded and access the capital markets. As part of the
    bankruptcy proceeding, both Chrysler and GM sold the majority of their
    assets to private companies. These companies are not public: they are
    neither SEC-registrants nor traded on any exchange.
        \464\ See COP September Oversight Report, supra note 108, at 68-69.
    Pursuant to its operating agreement, GM will attempt to make a
    reasonable best efforts IPO by July 10, 2010. See Allison Testimony
    before House Oversight and Government Reform Committee, supra note 118,
    at 12.
    ---------------------------------------------------------------------------
        Following the completion of a successful IPO, the Treasury
    auto team has made clear that it intends to dispose of
    Treasury's ownership stakes in Chrysler and GM ``as soon as is
    practicable.'' At least with respect to GM, where Treasury
    holds 60.8 percent of the company, Treasury does not expect to
    sell its entire stake in the IPO.\465\ The Stockholders
    Agreement calls for Treasury to use reasonable best efforts to
    effect an IPO by July 10, 2010.\466\ In its Shareholder's
    Agreement, Chrysler has agreed to file a shelf registration
    statement with the SEC either six months after an IPO or on
    January 1, 2013, whichever is earlier.\467\
    ---------------------------------------------------------------------------
        \465\ See Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 12.
        \466\ Stockholders Agreement by and among General Motors Company,
    United States Department of the Treasury, 7176384 Canada Inc., and UAW
    Retiree Medical Benefits Trust, at 8 (July 10, 2009) (online at
    www.sec.gov/Archives/edgar/data/1467858/000119312509150199/dex101.htm)
    (hereinafter ``GM Stockholders Agreement''); see also Agency Financial
    Statement 2009, supra note 32, at 44.
        \467\ Under the terms of the Chrysler Shareholders Agreement,
    Treasury can require Chrysler to file a registration statement under
    the Securities Act of 1933 (a ``demand registration''); in the case of
    an IPO, such demand notice can only be delivered by either (a) one or
    more holders holding 10 percent or more of the equity securities, or
    (b) both Treasury and Canada. Shareholders Agreement Among Fiat Newco,
    United States Department of the Treasury, UAW Retiree Medical Benefits
    Trust, Canada Development Investment Corporation, and the Other Members
    Party Hereto, at section 3.2(a)(i) (filed May 12, 2009) In Re Chrysler
    LLC, S.D.N.Y. (No. 09 B 50002 (AJG)) (online at
    www.chryslerrestructuring.com/). Treasury cannot seek more than one
    demand registration in any 12-month period, and cannot request more
    than five. Id., at section 3.2(a)(ii).
    ---------------------------------------------------------------------------
        The Treasury auto team has not ruled out other ways of
    exiting ownership of these companies and returning them to
    private hands, but options such as selling Treasury's stake to
    private equity investors seem unlikely at present.\468\
    Treasury's stake in Chrysler is small enough that Treasury
    believes that it could exit ownership of Chrysler promptly upon
    Chrysler's filing of a shelf registration statement. As noted
    above, Treasury's stake in GM is sufficiently large that it
    would be extremely difficult for Treasury either to find a
    buyer or buyers, and it is not clear whether significant sales
    would have a destabilizing effect on GM or on the markets.
    Treasury has stated, however, that when it is able to sell, it
    should do so in a transparent and open manner so as to avoid
    additional destabilization.\469\
    ---------------------------------------------------------------------------
        \468\ At a July 29, 2009 briefing with Panel staff, Treasury and
    Task Force staff indicated that, at least at that point, no private
    equity investor has come along with demonstrated interest in investing
    in these companies, and as of the end of 2009, this remains unchanged.
    Treasury conversations with Panel staff (Dec. 22, 2009). See generally
    Section D.7(c), infra.
        There are also several pre-IPO contractual limitations on the
    public sale of Treasury's ownership stakes in GM that are set out in
    the Stockholders Agreement. See GM Stockholders Agreement, supra note
    466, at 8-9.
        \469\ Treasury conversations with Panel staff (Dec. 22, 2009).
    ---------------------------------------------------------------------------
        In making the decision--or decisions--to sell the equity
    stakes that it holds in the automotive companies, Treasury will
    have to balance the desire to exit as soon as practicable, as
    articulated by the President and the head of the Treasury auto
    team,\470\ with the need to maximize the return or minimize the
    loss to taxpayers, as dictated by EESA.\471\ Maximizing returns
    may, however, argue for holding the investments for longer than
    Treasury would otherwise prefer, bringing these two goals into
    conflict. It is not easy to time the markets, and Treasury
    cannot force Chrysler's board, at least, to engage in an IPO.
    Until the companies go public through the IPO process,
    Treasury's primary and perhaps only option is to sell its stake
    privately, which, as discussed above, remains an unlikely
    event, although of the two, it would be more likely that
    Treasury could sell the Chrysler stake privately. Once the
    companies become public companies subject to SEC reporting
    requirements, Treasury's options would be somewhat broader.
    Subject to certain conditions, Treasury could sell large stakes
    in SEC-registered secondary offerings.\472\ Treasury could also
    sell smaller amounts of shares into the public markets.\473\
    ---------------------------------------------------------------------------
        \470\ See White House, Remarks by the President on General Motors
    Restructuring (June 1, 2009) (online at www.whitehouse.gov/
    the_press_office/Remarks-by-the-President-on-General-Motors-
    Restructuring/) (hereinafter ``Remarks by the President on GM'') (``In
    short, our goal is to get GM back on its feet, take a hands-off
    approach, and get out quickly.''); see also COP September Oversight
    Report, supra note 108, at 69.
        \471\ See 12 U.S.C. Sec. 5213.
        \472\ See Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, supplemented by Treasury
    conversations with Panel staff (Dec. 22, 2009).
        \473\ Shareholders that are ``affiliates'' of a company (in
    general, those with a significant stake in the voting equity of the
    company, or the right to a board seat) may sell their shares in the
    public markets without registration of the transaction with the SEC.
    SEC rules impose volume, timing, and other restrictions on such sales.
    17 CFR Sec. 230.144 (2009). Any such sales by the government are likely
    to have a significant impact on the securities market, which may
    suspect a signal to the market with respect to the specific companies,
    the auto industries, or the economy in general. For this reason (and
    the general difficulty in timing the market discussed above), holding
    these equity stakes in a trust, discussed in more detail below, might
    help to manage the taxpayers' stake more efficiently and maximize
    returns.
    ---------------------------------------------------------------------------
        Until it exits ownership of Chrysler and GM, Treasury will
    continue to be a substantial shareholder of these companies;
    however, Treasury does not intend to take the activist role
    commonly associated with large private shareholders.\474\ Mr.
    Bloom, who was appointed to lead the Treasury auto team, has
    stated that President Obama gave the Task Force two directives
    regarding its approach to the automotive restructurings. First,
    the Task Force was to avoid intervening in the day-to-day
    corporate management of GM and Chrysler, and instead act as ``a
    potential investor of taxpayer resources'' with the goal of
    promoting profitable companies that contribute to economic
    growth without taxpayer support.\475\ Second, the Task Force
    was to ``behave in a commercial manner.'' \476\ The Panel noted
    the tension between these dual roles in its September oversight
    report. President Obama has stated that each company's board of
    directors and management team are responsible for achieving
    financial and operational restructuring as well as cultural
    changes at GM and Chrysler.\477\
    ---------------------------------------------------------------------------
        \474\ See Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 5.
        \475\ See Congressional Oversight Panel, Written Testimony of Ron
    Bloom, Senior Advisor to the Secretary of the Treasury and Senior
    Counselor on Manufacturing Policy, Field Hearing: Oversight of TARP
    Assistance to the Automobile Industry, 111th Cong. (July 27, 2009)
    (online at cop.senate.gov/documents/testimony-072709-bloom.pdf)
    (hereinafter ``Ron Bloom Written Testimony'').
        \476\ See Senate Committee on Banking, Housing, and Urban Affairs,
    Testimony of Senior Advisor at the U.S. Department of the Treasury Ron
    Bloom, The State of the Domestic Automobile Industry: Impact of Federal
    Assistance, 111th Cong. (June 10, 2009) (online at
    banking.senate.gov/public/
    index.cfm?FuseAction=Files.View&FileStore_id=40341601-355c-4e6f-b67f-
    b9707ac88e32).
        \477\ See Remarks by the President on GM, supra note 470; see also
    Ron Bloom Written Testimony, supra note 472.
    ---------------------------------------------------------------------------
        Testifying before the Panel, Mr. Bloom reiterated that
    while the government has a partial ownership stake in these
    companies, the Task Force should manage its stake in a ``hands
    off'' manner, voting only on core governance issues such as the
    selection of directors and other major corporate actions.\478\
    Characterizing the Administration as a ``reluctant
    shareholder'' in GM and Chrysler, Mr. Bloom also testified that
    Treasury would work with a ``firm conviction to manage that
    investment commercially'' and dispose of equity stakes ``as
    soon as practicable.'' \479\ Further, the GM Shareholders'
    Agreement provides that after GM's IPO, Treasury will only vote
    on certain matters, including elections to the board, certain
    major transactions, such as merger or dissolution, and matters
    in which Treasury must vote its shares in order for the
    shareholders to take action. In the latter case, Treasury will
    vote its shares in the same proportion (for, against, or
    abstain) as the other shares are voted.\480\
    ---------------------------------------------------------------------------
        \478\ See Ron Bloom Written Testimony, supra note 472; see also COP
    September Oversight Report, supra note 108, at 82-83.
        \479\ Ron Bloom Written Testimony, supra note 472. See also Allison
    Testimony before House Oversight and Government Reform Committee, supra
    note 118, at 5.
        \480\ See Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 6.
    ---------------------------------------------------------------------------
        While the Administration's stated purpose is not to involve
    the federal government in daily business decisions, Treasury
    cannot entirely abrogate its responsibilities as a shareholder.
    Even if Treasury restricts its participation to ``core
    governance,'' it must reasonably and responsibly establish its
    interpretation of ``core governance.'' As an example, given the
    ongoing and sweeping changes at both companies, a management
    succession plan--which SEC staff has recently described as one
    of a board's key functions--is critical.\481\ If Treasury has
    not clearly established a policy for its involvement in
    management succession plans, it should do so promptly.
    ---------------------------------------------------------------------------
        \481\ See Division of Corporation Finance, Securities and Exchange
    Commission, Shareholder Proposals, Staff Legal Bulletin No. 14E (CF)
    (Oct. 27, 2009) (online at www.sec.gov/interps/legal/cfslb14e.htm).
    ---------------------------------------------------------------------------
        Treasury has been directed and intends to make minimal
    interventions in management, as well as shareholder decisions.
    Overall, Treasury has expressed a firm commitment to its
    limited role. In conversations with Panel staff, the Treasury
    auto team indicated that they would, at most, share their
    opinions about strategy with the management of the auto
    companies. The management of the auto companies, however, is
    entirely responsible for setting strategy, and may ignore
    Treasury's opinions as they please. A ``hands off'' approach,
    however, may not provide the influence necessary to achieve the
    cultural changes most likely to lead to sustained viability for
    Chrysler and GM. If the government maintains the role of a
    disinterested shareholder, it may be difficult to protect
    taxpayer interests in these companies. On the other hand, it
    may be similarly detrimental to taxpayer interests if Treasury
    is an involved shareholder, as in this role Treasury arguably
    suffers from inherent conflicts of interest, politics, lack of
    knowledge, and lack of competence.
        Treasury's position is that the government, as shareholder,
    distorts the market in such a way that the auto companies--and
    accordingly the taxpayers--will ultimately reap greater benefit
    from a passive government shareholder. Where a typical
    shareholder can be assumed to seek profit maximization,
    Treasury is concerned that any shareholder activism on its part
    will be perceived through a political rather than commercial
    lens. Treasury believes this would harm the market as a whole
    in addition to harming the auto companies. Under this model,
    private shareholders, faced with a large shareholder that acts
    with multiple, possibly political motivations, would be more
    reluctant to invest in the company, delaying Treasury's exit
    and the return of the company to private hands, and overall
    reducing the value of Treasury's investment.\482\ It is
    difficult to determine which of these approaches would cause
    more or less harm to the markets in general or to the auto
    companies in particular. It is also possible that the passive
    approach promotes market stability in general at the expense of
    the taxpayers' specific investment in the auto companies.
    ---------------------------------------------------------------------------
        \482\ See Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118; Treasury conversations with Panel
    staff (Dec. 22, 2009). On the other hand, although Treasury is
    concerned that its involvement may depress stock price, absent
    Treasury's and the U.S. Government's intervention, the liquidated
    companies' stock would have no value at all.
    ---------------------------------------------------------------------------
        To mitigate the potential conflicts of interest inherent in
    government ownership of Chrysler and GM shares, the Panel
    recommended in September that Treasury consider placing its
    Chrysler and GM shares in an independent trust that would be
    insulated from political pressure and government
    interference.\483\ At a hearing on October 22, 2009, however,
    Assistant Secretary Allison questioned whether an independent
    trust would be an efficient use of taxpayer funds given the
    requisite ``administrative infrastructure'' that would be
    involved.\484\ Treasury also has expressed concern that a trust
    might be inconsistent with its supervisory obligations under
    EESA. In February 2009, however, Secretary Geithner discussed
    the possibility of putting assets from the TARP, as then-
    constituted in the Capital Assistance Program, in a Financial
    Stability Trust.\485\ The Capital Assistance Program ultimately
    closed without making any investments, and therefore no assets
    were ever placed in the Financial Stability Trust.\486\
    ---------------------------------------------------------------------------
        \483\ See COP September Oversight Report, supra note 108, at 114.
    In addition, Senator Warner and Senator Corker have proposed the TARP
    Recipient Ownership Trust Act of 2009, which would move any government
    private company shareholding over 20 percent into a trust with
    instructions to liquidate the stakes by the end of 2011. See Sen. Bob
    Corker, Corker, Warner Introduce TARP Recipient Ownership Trust Act of
    2009 (June 17, 2009) (online at
    corker.senate.gov/public/
    index.cfm?FuseAction=NewsRoom.NewsReleases&ContentRecord_id= efcc93cf-
    0189-87f7-0c26-fb49c985a43f).
        \484\ See Congressional Oversight Panel, Transcript Testimony of
    Treasury Assistant Secretary for Financial Stability Herbert M.
    Allison, Jr., COP Hearing with Assistant Treasury Secretary Herbert M.
    Allison, Jr., at 63 (Oct. 22, 2009).
        \485\ U.S. Department of the Treasury, Secretary Geithner
    Introduces Financial Stability Plan (Feb. 10, 2009) (www.treas.gov/
    press/releases/tg18.htm) (hereinafter ``Secretary Geithner Introduces
    Financial Stability Plan'').
        \486\ U.S. Department of the Treasury, Treasury Announcement
    Regarding the Capital Assistance Program (Nov. 9, 2009) (online at
    www.financialstability.gov/latest/tg_11092009.html) (hereinafter
    ``Treasury Announcement Regarding the CAP'').
    ---------------------------------------------------------------------------
        As part of its efforts to increase profitability, on
    November 4, 2009, Chrysler unveiled its five-year business
    plan.\487\ Under this plan, the current Chairman of the Board,
    Robert Kidder, states that Chrysler's top priority will be to
    create a compelling brand and product offering. In addition,
    Chrysler will leverage its alliance with Italian automaker
    Fiat, manage its supply chain to match customer demand and
    production, strengthen its dealer network, cut fixed costs,
    develop its new MOPAR brand, build a strong team and high
    performance culture, and adopt a financial plan that aims to
    recapitalize the company. In conversations with Panel staff,
    Chrysler maintained that it is happy with its progress in
    merging with Fiat, and believes that it is creating a more
    efficient company. Its product mix will include more fuel-
    efficient cars, and it believes it is making progress in
    reducing the time-to-market for newer products. Chrysler is
    also sensitive to the need to act quickly, and believes that it
    has brought greater focus to its product offerings.\488\
    ---------------------------------------------------------------------------
        \487\ See generally Chrysler Group, Our Plan Presentation (Nov. 4,
    2009) (online at www.chryslergroupllc.com/business/?redir=cllc).
        \488\ Chrysler conversations with Panel staff (Dec. 16, 2009).
    ---------------------------------------------------------------------------
        GM also issued a five-year plan,\489\ which includes
    consolidating facilities, streamlining brands and dealer
    networks, creating ``fewer, better'' vehicles, developing
    technologies to increase fuel efficiency, hybrids, advanced
    propulsion, and addressing unprofitable foreign operations. On
    November 16, 2009, GM stated that its focus is currently on
    ``top line performance'' and gaining market share by offering
    ``performance and value'' to customers.\490\ In subsequent
    conversations with Panel staff, GM stated that it believes that
    it has made good progress on initiatives designed to increase
    its competitiveness, including: building plants that can switch
    between products; developing a more versatile product mix, with
    more small cars; building its four core brands and attempting
    to divest other brands; and creating strategic alliances in
    overseas markets. GM believes that the restructured business
    will be simpler and much easier to manage as a result.\491\
    ---------------------------------------------------------------------------
        \489\ See generally General Motors Corporation, 2009-2014
    Restructuring Plan (Feb. 17, 2009) (online at
    www.financialstability.gov/docs/AIFP/GMRestructuringPlan.pdf).
        \490\ General Motors Corporation, General Motors Announces the New
    Company's July 10-September 30 Preliminary Managerial Results (Nov. 16,
    2009) (online at media.gm.com/content/media/us/en/news/
    news_detail.html/content/Pages/news/us/en/2009/Nov/1116_earnings).
        \491\ GM conversations with Panel staff (Dec. 15, 2009).
    ---------------------------------------------------------------------------
        Treasury has stated that the new companies are, in capital
    structure alone, fundamentally quite different from their prior
    incarnations. In addition to manufacturing changes and product
    shifts, the restructured companies lack the debt that dogged
    old Chrysler and old GM. They have lower overhead and a lower
    break-even point. They compete in a smaller market and have
    simplified obligations to fewer debt and equity holders.
    Treasury believes that these differences significantly
    distinguish the current auto companies from their predecessors,
    and will help them to become profitable.\492\
    ---------------------------------------------------------------------------
        \492\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118, at 5; Treasury conversations with
    Panel staff (Dec. 22, 2009).
    ---------------------------------------------------------------------------
                c. Analysis of Intended Exit Strategy
        The crisis that beset Chrysler and GM was a long time
    coming, even if its severity was unprecedented. As President
    Obama observed in his speech on the GM bankruptcy, the crisis
    resulted from a long series of poor business decisions, large
    legacy costs, and failure to address a changing market.\493\ It
    is to be hoped that the near-liquidation of these companies
    will impress upon their respective managements and employees
    the need to be more responsive to changes in markets, commodity
    prices, and consumer preferences. Both Chrysler and GM were
    resting upon a very long period of market dominance, and failed
    to respond promptly when it was revealed that their influence
    had waned and their competitors were more nimble and modern,
    both culturally and technologically. High labor costs--from
    wages, benefits, and rigid work rules--further hampered GM's
    and Chrysler's competitiveness.\494\ Compounding the
    difficulty, the auto industry overall suffers from a long time-
    to-market, relatively high fixed and variable costs, and
    substantial infrastructure needs, which make it difficult for
    even a flexible and adaptive company to move quickly. Reports
    that GM is restructuring its bureaucracy are encouraging,\495\
    although substantial additional changes will be needed for both
    companies to again become profitable and permit Treasury to
    divest its holdings.
    ---------------------------------------------------------------------------
        \493\ See Remarks by the President on GM, supra note 470; see also
    COP September Oversight Report, supra note 108, at 107-110.
        \494\ House Select Committee on Global Warming, Testimony of
    Professor Peter Morici, The Energy Independence Implications of the
    Auto Bailout Proposal, 110th Cong., at 2 (Dec. 9, 2008) (online at
    www.globalwarming.house.gov/tools/3q08materials/files/0068.pdf).
        \495\ Treasury conversations with Panel staff (Dec. 22, 2009).
    ---------------------------------------------------------------------------
        As discussed above, Treasury owns equity in and holds debt
    of both Chrysler and GM. While repayments on the debt and
    successful IPOs are both dependent on revitalized companies,
    Treasury will likely hold the equity stakes for longer than the
    debt will remain outstanding. The equity stakes, accordingly,
    are of greater concern in a discussion of exit. Further, it is
    Treasury's GM holding that poses the most difficulty:
    Treasury's stake in Chrysler is small enough that Treasury
    could sell it shortly after a Chrysler IPO or to a third-party
    buyer.\496\ The size of the GM holding therefore creates unique
    circumstances: In the absence of buyers for a block sale or
    sales, in all probability, Treasury will sell its stake into
    the public market, and it probably cannot sell its entire stake
    simultaneously. Although it continues to evaluate the best
    methods for divesting its holdings in the GM equity, Treasury
    currently takes the position that transparency--in the form of
    successive registered follow-on offerings--will best serve the
    markets and the taxpayers' investment in the auto
    companies.\497\ If, by contrast, Treasury were to sell its
    stake at less predictable or less transparent intervals,
    Treasury believes that potential investors might be concerned
    about unpredictable pressure on the stock price from Treasury's
    sales. Any such sales, however, must follow the IPO, and likely
    will be subject to a lock-up as well. Treasury therefore
    probably cannot sell even the larger part, much less all, of
    its equity stake until years in the future.
    ---------------------------------------------------------------------------
        \496\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118.
        \497\ Allison Testimony before House Oversight and Government
    Reform Committee, supra note 118; Treasury conversations with Panel
    staff (Dec. 22, 2009).
    ---------------------------------------------------------------------------
        It is unusual for any company to have a majority
    shareholder as passive as Treasury intends to be. This stance,
    especially with respect to Treasury's GM holding, may result in
    no other entity's being able to play the traditional majority
    shareholder role, and create a governance vacuum. This concern
    will intensify as the auto companies return to being publicly
    traded companies. The Panel's September report suggested that
    Treasury consider holding its auto company shares in a trust,
    to which Treasury has responded with a variety of concerns,
    from administrative costs to statutory obligations. In addition
    to these concerns, establishing a trust to hold the shares
    might: slow Treasury's exit; prolong its involvement in the
    market; and make future interventions more palatable, any or
    all of which could set an inappropriate precedent. However,
    particularly with respect to the GM stake, it may be some time
    before Treasury is able to divest itself of its holdings. GM
    will therefore have a deliberately disinterested and passive
    majority shareholder for the foreseeable future, which may
    hamper its ability to again become viable and may affect the
    value that the capital markets place on it. This being the
    case, the Panel believes that Treasury should continue to
    contemplate whether it should place the automobile company
    shares, particularly the GM shares, in a trust. In an earlier
    incarnation of the TARP, Treasury had contemplated creating a
    trust for its financial sector investments.\498\ Treasury
    should revisit the discussions surrounding the Financial
    Stability Trust to help determine whether any of the
    considerations in operation at that time might now be
    applicable to the automobile company shares. If Treasury is of
    the opinion that a trust is unnecessary at present, it should
    reconsider this position at the time an IPO is being
    planned.\499\
    ---------------------------------------------------------------------------
        \498\ Secretary Geithner Introduces Financial Stability Plan, supra
    note 485.
        \499\ Other unconventional measures that Treasury might consider
    would include replacing its common stock with a class of limited
    shares, and, drawing from private equity traditions, breaking its
    holding into six or more blocks and having private managers manage
    those holdings, actively exercising the governance rights that
    accompany the shares.
    ---------------------------------------------------------------------------
        The uncertainty surrounding the long-term prospects for
    these investments, of course, raises additional issues.
    Investments without clear time frames for exit--if any--pose
    particularly difficult questions about Treasury's involvement
    in a commercial enterprise. Even if Treasury believes that the
    taxpayers' best interest is served by its ``hands-off''
    approach, it must nonetheless perform rigorous diligence of its
    ongoing investment in search of good divestment windows. If,
    instead, Treasury later determines that it should take a more
    interventionist role, it must still find the appropriate
    balance between serving the taxpayers' need and the significant
    problems posed by involving Treasury in management. In any
    case, however, Treasury should not exit either company without
    establishing that it has a reasonable plan for long-term
    viability. The alternative, as discussed below, would be to
    reinstitute the full-scale liquidation avoided through
    commitment of TARP funds.
        The Panel is hopeful that both Chrysler and GM will return
    to profitability in short order, making Treasury's continued
    involvement unnecessary. The Panel also appreciates the auto
    task force's difficulty in balancing its role as a shareholder
    with its obligations to the taxpayers and its decided
    reluctance to become actively involved in management. That
    said, while there are many ways in which Treasury differs from
    a shareholder in the ordinary course, one in particular is
    relevant to our discussion: what Treasury should do if and when
    it determines that it has made a ``bad investment.'' A typical
    shareholder may decide that he or she no longer wishes to hold
    a given investment, and may sell, generally without much effect
    on the market. If, however, the automotive companies prove
    unlikely to become profitable again, even if far in the future,
    Treasury cannot simply sell and write off its investment. And
    if Treasury sees no possibility of a sale, then in the best
    interests of the taxpayers, Treasury may need to contemplate
    its only remaining means of exit--an orderly wind-down of the
    relevant company. Not only can this never be a casual decision,
    but it must also involve deep and careful consideration of the
    effect on all parties concerned--taxpayers, investors,
    suppliers, car owners, and industrial workers, among others.
        The consequences of liquidating one or both of these
    companies, even if far into the future and in an orderly
    fashion, would likely still be significant for the
    economy.\500\ The Panel is hopeful that the global financial
    crisis that precipitated the TARP will not be repeated, and
    that if it is, the industries that require rescue will be more
    robust. If there is a similar crisis, or if after some period
    of time, one or both of GM and Chrysler appear unlikely to ever
    become profitable again, Treasury will face a difficult choice.
    Treasury should have procedures for the continuing evaluation
    of its investment in the automotive industry. This report
    discusses these procedures in the context of divestment
    windows. These procedures should be formulated with an
    awareness that Treasury may need to consider exit even though
    the subject company or companies cannot continue without
    Treasury's support. The Panel hopes that no such action will
    ever be necessary, but believes that in order for Treasury to
    have a comprehensive understanding of its role as an investor,
    it must internally take note of this possibility. That said,
    publication of precise metrics or timelines may be inadvisable,
    both because they could limit Treasury's discretion and could
    negatively affect the companies. Treasury, at present, takes
    the view that the auto companies will not be ripe for long-term
    evaluation until after any IPO. While it is reasonable to look
    to the IPOs as a more concrete point at which to assess the
    auto companies, it is also appropriate for Treasury to
    consider, if not plan for, the longer term.\501\
    ---------------------------------------------------------------------------
        \500\ See COP September Oversight Report, supra note 108, at 7-23.
        \501\ The Panel understands that Treasury intends to begin a formal
    evaluation of its investment in the automobile companies shortly.
    ---------------------------------------------------------------------------

    8. GMAC

        Since the results of the stress tests were announced in
    early May,\502\ nine of the 10 bank holding companies that were
    identified as needing to raise additional capital have met or
    exceeded their capital raising requirements without government
    assistance.\503\ GMAC, which was unable to raise sufficient
    outside capital to meet the capital buffer established by the
    stress tests, originally set at $11.5 billion, is the only
    participant to seek additional TARP funds from Treasury.\504\
    ---------------------------------------------------------------------------
        \502\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170; COP June Oversight Report, supra note 175, at 41.
        \503\ Agency Financial Statement 2009, supra note 32, at 25.
        \504\ Prior to the December 2009 capital injection, Treasury owned
    $13.1 billion in preferred shares in GMAC, and 35 percent of GMAC's
    common equity. Of this $13.1 billion, $5.25 billion was acquired in
    December 2008 when Treasury purchased $5 billion in preferred equity
    and received warrants for an additional $250 million in preferred
    equity. Treasury then acquired an additional $7.875 billion in May 2009
    when it purchased $7.5 billion of convertible preferred shares and
    received warrants for an additional $375 million. Also, on May 29,
    2009, Treasury exercised its option to exchange a $884 million loan for
    the ownership interest that GM had purchased, amounting to about 35
    percent of the common membership interests in GMAC. OFS FY09 Financial
    Statements, supra note 133, at 62, 74.
    ---------------------------------------------------------------------------
        At the conclusion of the stress tests in May 2009,\505\
    Treasury made a ``down payment'' of $7.5 billion but
    acknowledged that GMAC would need additional capital
    support.\506\ On December 30, 2009, Treasury provided GMAC with
    $3.8 billion in new capital.\507\ This amount was $1.8 billion
    less than the remaining $5.6 billion shortfall on the capital
    buffer calculated in May by the Federal Reserve under the
    stress tests.\508\ According to Treasury, the reduced size of
    the capital injection was due to ``less disruption'' than
    anticipated in the GM and Chrysler restructurings.\509\ The
    Panel is not aware of the stress tests being recalculated for
    any other bank that participated in them, although it must be
    noted that GMAC is the only participant that failed to meet the
    stress tests' November 2009 deadline for raising additional
    capital.
    ---------------------------------------------------------------------------
        \505\ At the conclusion of the stress tests in May, the Federal
    Reserve announced that GMAC required an additional $11.5 billion in
    capital, $9.1 billion of which had to be in the form of fresh capital
    (as opposed to conversions). Treasury conversations with Panel staff
    (Jan. 8, 2010); Treasury Announces Restructuring of Commitment To GMAC,
    supra note 170.
        \506\ Of this $7.5 billion, $3.5 billion was used to add to GMAC's
    required capital buffer, and $4 billion was used to support new
    financing for Chrysler dealers and customers. Treasury conversations
    with Panel staff (Jan. 8, 2010). The term sheet for this investment
    stated that Treasury would invest ``up to $5.6 billion'' at a later
    date.
        Treasury stated that it decided to ``stage'' its investments
    because it believed that the GM and Chrysler bankruptcy proceedings
    might be less disruptive, and faster, than anticipated and because it
    wanted to give a new GMAC management team the opportunity to develop
    its own strategy for raising capital. Treasury conversations with Panel
    staff (Jan. 8, 2010). Less disruptive bankruptcy proceedings would have
    the effect of lowering GMAC's capital needs because the value of the GM
    and Chrysler automobiles financed by GMAC and forming a large part of
    its collateral, would be higher with GM and Chrysler standing behind
    their warranties. Id.; see also Treasury Announces Restructuring of
    Commitment To GMAC, supra note 170; OFS FY09 Financial Statements,
    supra note 133, at 62 (``GMAC is in discussions with the Treasury-OFS
    regarding additional financing to complete GMAC's post-SCAP capital
    needs up to the amount of $5.6 billion, as previously discussed in
    May'').
        \507\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170. The transaction closed and was funded on December 30, 2009.
    Treasury conversations with Panel staff (Jan. 6, 2010). Treasury stated
    that it timed the transaction to close in fiscal year 2009 in order to
    ``clean up'' GMAC's balance sheet. Treasury conversations with Panel
    staff (Jan. 8, 2010).
        \508\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170; Treasury Announcement Regarding the CAP, supra note 486
    (``[GMAC's] capital need is expected to be lower than anticipated at
    the time the SCAP results were announced''); U.S. Department of the
    Treasury, Questions for the Record for U.S. Department of the Treasury
    Assistant Secretary Herbert M. Allison Jr., at 9 (Oct. 22, 2009)
    (online at cop.senate.gov/documents/testimony-102209-allison-qfr.pdf)
    (hereinafter ``Questions for the Record for Secretary Allison''); OFS
    FY09 Financial Statements, supra note 133, at 62 (``GMAC is in
    discussions with the Treasury-OFS regarding additional financing to
    complete GMAC's post-SCAP capital needs up to the amount of $5.6
    billion, as previously discussed in May''). A Wall Street Journal story
    in late October stated that the capital injection would be between $2.8
    billion and $5.6 billion. Dan Fitzpatrick and Damian Paletta, GMAC Asks
    for Fresh Lifeline, Wall Street Journal (Oct. 19, 2009) (online at
    online.wsj.com/article/SB125668489932511683.html?mod=djemalertNEWS).
        \509\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170.
    ---------------------------------------------------------------------------
        The additional funds were provided in the form of $2.54
    billion in Trust Preferred Securities (TruPs) and $1.25 billion
    in Mandatory Convertible Preferred Stock (MCP).\510\ Treasury
    also received warrants to purchase $127 million of TruPs and
    $63 million of MCP, which it exercised upon closing.\511\ At
    the same time, Treasury converted $5.25 billion of its
    preferred securities to MCPs (which have a more advantageous
    conversion rate) and converted $3 billion of its MCPs to common
    stock, increasing its ownership stake from 35 percent to 56
    percent.\512\ Treasury also took the opportunity to recut the
    terms of some of its existing securities, including the
    conversion terms. With its enlarged ownership stake, Treasury
    has the right to appoint four directors to GMAC's board of
    directors.\513\ In total, Treasury now holds $2.67 billion in
    TruPs and $11.4 billion in MCPs.
    ---------------------------------------------------------------------------
        \510\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170.
        \511\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170.
        \512\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170.
        \513\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170. The increase in ownership stake from 35 percent to 56 percent
    gave Treasury the right to appoint two additional directors.
    ---------------------------------------------------------------------------
        The additional capital was provided under the AIFP, rather
    than under the Capital Assistance Program (CAP), which was
    established to provide capital to financial institutions in
    connection with the stress tests.\514\ Treasury stated that it
    used the AIFP because its previous capital injections had been
    through the AIFP and because of the relationship between GMAC
    and the automotive industry.\515\ The terms of the securities
    issued under the AIFP are also more advantageous to Treasury.
    ---------------------------------------------------------------------------
        \514\ Id.; see also Congressional Oversight Panel, December
    Oversight Report: Taking Stock: What Has the Troubled Asset Relief
    Program Achieved?, at 20 (Dec. 9, 2009) (online at cop.senate.gov/
    documents/cop-120909-report.pdf) (hereinafter ``COP December Oversight
    Report''). Although Treasury provided the funds through the AIFP, it
    stated that it was ``acting on its previously announced commitment to
    provide capital to GMAC as identified in May as a result of the
    Supervisory Capital Assessment Program (SCAP).'' Treasury Announces
    Restructuring of Commitment To GMAC, supra note 170.
        \515\ Treasury conversations with Panel staff (Jan. 8, 2010).
    ---------------------------------------------------------------------------
        GMAC intends to seek financing in the credit markets during
    2010, and if it is able to access the equity markets, then
    Treasury will be able to start unwinding its position.
    Treasury's large MCP position makes it likely that it will
    convert the MCPs and sell common stock in the market after an
    eventual IPO, although a private sale cannot be ruled out.\516\
    In either case, Treasury's goal is to ``dispose of the
    government's interests as soon as practicable consistent with
    EESA goals.'' \517\ Treasury intends to sell its interests in a
    timely and orderly manner that ``minimizes financial market and
    economic impact,'' under what it determines to be appropriate
    market conditions.\518\
    ---------------------------------------------------------------------------
        \516\ Agency Financial Statement 2009, supra note 32, at 102;
    Treasury conversations with Panel staff (Jan. 8, 2010).
        \517\ Agency Financial Statement 2009, supra note 32, at 44.
        \518\ Agency Financial Statement 2009, supra note 32, at 40.
    ---------------------------------------------------------------------------
        In answers to questions posed by members of the Panel,
    Assistant Secretary Allison suggested that Treasury's
    assistance to GMAC has provided a ``reliable source of
    financing to both auto dealers and customers seeking to buy
    cars,'' helped ``stabilize our auto financing market,'' and
    contributed ``to the overall economic recovery.'' \519\ GMAC is
    a source of retail and wholesale financing for both GM and
    Chrysler.\520\ Treasury has stated that if it refused to
    support GMAC after providing assistance to GM and Chrysler, it
    would undermine its own investments in the automotive
    companies. Treasury has also stated that denying support to
    GMAC in December 2009 would have placed Treasury's previous
    investments at risk, and that refusing assistance after
    promising it in May would have had a detrimental effect on
    market confidence.\521\
    ---------------------------------------------------------------------------
        \519\ Questions for the Record for Secretary Allison, supra note
    508, at 9; see also COP December Oversight Report, supra note 514, at
    71.
        \520\ Treasury conversations with Panel staff (Jan. 8, 2010).
        \521\ Treasury conversations with Panel staff (Jan. 8, 2010).
    ---------------------------------------------------------------------------
        In spite of Assistant Secretary Allison's general
    statements about the reasons for providing additional support
    to GMAC, Treasury has not yet articulated a specific and
    convincing reason to support the company. Treasury's most
    recent announcement of assistance states only that its
    ``actions fulfill Treasury's commitments made in May to GMAC in
    a manner which protects taxpayers to the greatest extent
    possible.'' \522\ It has never stated that a GMAC failure would
    result in substantial negative consequences for the national
    economy. If Treasury has made such a determination, then it
    should say so publicly. It does not appear that the support has
    been made on the merits of the investment, particularly given
    GMAC's recent statements that it anticipates reporting fourth
    quarter 2009 losses of approximately $5 billion.\523\ Treasury
    has not indicated whether it will be open to providing
    additional financing to GMAC in the future.
    ---------------------------------------------------------------------------
        \522\ Treasury Announces Restructuring of Commitment To GMAC, supra
    note 170.
        \523\ GMAC Financial Services, 2009 Fourth Quarter Strategic
    Actions (Jan. 5, 2009) (online at phx.corporate-ir.net/
    External.File?item=
    UGFyZW50SUQ9MjY1MzIxN3xDaGlsZElEPTM2MzQ5M3xUeXBlPTI=&t=1); Samuel
    Spies, GMAC Expects to Report Q4 Loss of about $5B, SNL Financial (Jan.
    5, 2010).
    ---------------------------------------------------------------------------
        Moreover, GMAC has received different treatment from all
    other financial institutions that were subject to the stress
    tests. Unlike other institutions, it was subjected to
    additional stress tests after the initial stress test results
    were released in May, and unlike other institutions, its
    capital buffer requirements were revised in light of this
    second round of tests. GMAC was the only institution that was
    allowed to benefit from post-May improvements in its financial
    position and in related sectors of the economy. In the face of
    criticism about the merits of saving GMAC, Treasury owes the
    public a more detailed and convincing explanation not only of
    its rationale for providing substantial assistance to GMAC, but
    also of its rationale for treating GMAC differently than other
    stress-tested institutions.

    9. PPIP

        Treasury has committed up to $30 billion to be invested in
    the Public-Private Investment Program (PPIP), a TARP initiative
    pairing Treasury with private investors to purchase mortgage-
    backed securities as a means of jump-starting that market back
    into active trading. Treasury announced the PPIP on March 23,
    2009, as part of its efforts to repair balance sheets distorted
    by toxic assets and increase credit availability in the
    financial system.\524\ Although the PPIP, when announced,
    included both a legacy loans program and a legacy securities
    program, the legacy loan program has been postponed for the
    present.\525\ Because the loan program has not been
    implemented, this report will address only the securities
    program.
    ---------------------------------------------------------------------------
        \524\ U.S. Department of the Treasury, Treasury Department Releases
    Details on Public Private Partnership Investment Program (Mar. 23,
    2009) (online at www.ustreas.gov/press/releases/tg65.htm).
        \525\ ``Legacy securities'' are defined as ``Troubled real estate-
    related securities (residential mortgage-backed securities or
    commercial mortgage-backed securities), and other asset-backed
    securities lingering on institutions' balance sheets because their
    value could not be determined.'' Treasury Decoder, supra note 148.
    ---------------------------------------------------------------------------
        The PPIP was designed to draw private capital into the
    legacy securities market by creating public-private investment
    funds financed by private investors, whose capital
    contributions are matched dollar-for-dollar by Treasury using
    TARP funds. The funds may also obtain debt financing from
    Treasury equal to the full value of the fund's capital
    investments.\526\ The funds, called PPIFs, are managed by fund
    managers who have been selected by Treasury through an
    application process. According to Treasury, those who were
    ultimately selected were chosen based on a combination of the
    following criteria:
    ---------------------------------------------------------------------------
        \526\ This financing may include TALF financing, as described in
    Section D.10, infra.
    ---------------------------------------------------------------------------
              1. Demonstrated capacity to raise a minimum amount of
            private sector capital;
              2. Demonstrated experience investing in targeted
            asset classes, including through performance track
            records;
              3. A minimum amount (market value) of the targeted
            asset classes currently under management;
              4. Demonstrated operational capacity to manage the
            investments in a manner consistent with Treasury's
            stated investment objectives while also protecting
            taxpayers; and
              5. Headquartered in the United States (although the
            ultimate parent company need not be headquartered in
            the United States).\527\
    ---------------------------------------------------------------------------
        \527\ U.S. Department of the Treasury, Guidelines for the Legacy
    Securities Public-Private Investment Program (accessed Jan. 6, 2010)
    (online at www.financialstability.gov/docs/ProgramGuidelinesS-
    PPIP.pdf).
    ---------------------------------------------------------------------------
        Treasury ultimately selected nine funds, all of which have
    succeeded in raising the private capital necessary to qualify
    as fund managers under the program.\528\ As of December 31,
    2009, Treasury has committed approximately $30 billion in eight
    funds.\529\ Of the $30 billion invested under PPIP, $19.9
    billion was committed as senior debt and $9.9 billion as
    equity.\530\ Treasury received notes in exchange for its loans,
    with the ``same duration as the underlying fund.'' \531\
    ---------------------------------------------------------------------------
        \528\ One fund was recently frozen under the Key Man provision of
    the partnership agreement creating the fund due to the departure of the
    person named in that provision from the fund.
        \529\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166, at 19.
        \530\ These amounts represent Treasury's total commitment and not
    the actual amount disbursed. Id.
        \531\ See U.S. Department of the Treasury, Public-Private
    Investment Program: $500 Billion to $1 Trillion Plan to Purchase Legacy
    Assets (online at www.treas.gov/press/releases/reports/ppip--
    whitepaper--032309.pdf) (accessed Jan. 12, 2010). This expiration term
    will apply unless the note is accelerated in the event of default or
    the fund is dissolved earlier. See, e.g., U.S. Department of the
    Treasury, Loan Agreement (online at www.financialstability.gov/docs/
    Loan%20Agreement%20(redacted)%20-%20AB.PDF) (accessed Jan. 12, 2010).
    ---------------------------------------------------------------------------
        The PPIFs are structured as limited partnerships, with the
    Fund Manager serving as General Partner and Treasury, along
    with the other private investors, serving as Limited Partners.
    Under the terms of the partnership agreements, the General
    Partners have broad authority for the ``management, operation
    and policy of the Partnership,'' which is ``vested exclusively
    in the General Partner.'' \532\ Concerns have been expressed
    over Treasury's apparent lack of control over the funds and the
    funds' lack of transparency regarding their trading
    activities.\533\ Although the agreements require the General
    Partners to obtain Treasury approval for certain actions, these
    actions are limited and generally involve the PPIFs venturing
    beyond the prescribed terms of the program by, for example,
    purchasing assets other than those designated as ``eligible
    assets'' under the terms of the program. Obviously, as partner
    in the funds, Treasury has the right and ability to counsel the
    General Partners regarding investment strategy, but there is no
    provision in the agreements to provide Treasury with the
    ability to manage the assets directly or to dictate the General
    Partners' management of the assets. Treasury has yet to
    implement any measures to address these concerns.
    ---------------------------------------------------------------------------
        \532\ Amended and Restated Limited Partnership Agreement for
    AllianceBernstein Legacy Securities Master Fund, L.P., at 25 (online at
    www.financialstability.gov/docs/AB%20Complete%20LPA%20(redacted).pdf).
    The partnership agreements for the remaining PPIFs contain identical
    language.
        \533\ See COP August Oversight Report, supra note 65; SIGTARP,
    Quarterly Report to Congress, at 171 (July 21, 2009) (online at
    www.sigtarp.gov/reports/congress/2009/
    July2009_Quarterly_Report_to_Congress.pdf) (expressing concern over the
    lack of transparency in the PPIFs' trading activities and holdings and
    requesting that Treasury take measures to address these concerns).
    ---------------------------------------------------------------------------
        Under the agreements, each fund is able to conduct business
    in the legacy securities markets until the eighth anniversary
    of its inception, subject to a two-year extension with
    Treasury's consent, unless the fund is terminated earlier by
    the General Partner.\534\ Thus, the funds will be terminated
    and dissolved no later than 2020.\535\ After outstanding debt
    is repaid, any remaining funds will be divided equally between
    Treasury (on account of its equity investment) and the private
    investor.
    ---------------------------------------------------------------------------
        \534\ U.S. Department of the Treasury, Public-Private Investment
    Program (online at www.financialstability.gov/roadtostability/
    publicprivatefund.html) (accessed Dec. 31, 2009) (providing redacted
    versions of every executed partnership agreement between Treasury and
    the private investor in establishing PPIFs).
        \535\ Before Treasury and the private investor are paid on behalf
    of their capital investments, the PPIF must first repay loans plus
    principle, if any, under TALF. As previously discussed in this Section
    and Section D.9 supra, Treasury may also receive a portion of this debt
    repayment as a result of its financing of TALF's SPV.
    ---------------------------------------------------------------------------
        As of the date of this report, neither Treasury nor the
    funds have disclosed the nature of the PPIFs' investments.
        While Treasury will have no direct role in selling the
    assets held by the PPIFs, and therefore will not need as
    detailed an exit strategy as other programs will require, OFS
    will continue to have a responsibility to monitor the Fund
    Managers and the funds' investments.

    10. TALF

        Another small TARP program, the Term Asset-Backed
    Securities Loan Facility (TALF), will require very little
    action to facilitate a complete exit. FRBNY created the TALF in
    response to ``near-complete halt'' of the asset-backed
    securities (ABS) market in October 2008.\536\ Under the TALF,
    FRBNY provides non-recourse, three- to five-year loans to
    eligible borrowers who pledge qualifying ABS or commercial
    mortgage-backed securities.\537\ FRBNY receives monthly
    interest payments on these loans.\538\ As of December 31, 2009,
    TALF loan requests totaled approximately $61 billion.\539\
    Unless FRBNY grants an extension,\540\ the TALF will no longer
    make new loans after March 31, 2010 for loans collateralized by
    ABS, and after June 30, 2010 for loans collateralized by
    commercial mortgage-backed securities.\541\
    ---------------------------------------------------------------------------
        \536\ See Federal Reserve Bank of New York, Term Asset-Backed
    Securities Loan Facility: Frequently Asked Questions (online at
    www.newyorkfed.org/markets/talf_faq.html) (hereinafter ``TALF
    Frequently Asked Questions'') (accessed Jan. 12, 2010) (``The asset-
    backed securities (ABS) market has been under strain for some months.
    This strain accelerated in the third quarter of 2008 and the market
    came to a near-complete halt in October'').
        \537\ In addition to other criteria, an ``eligible borrower'' must
    be a ``U.S. company,'' as defined by FRBNY. See generally TALF Terms
    and Conditions, supra note 27. ``Eligible collateral'' includes ABS
    that have a long-term AAA credit rating and are backed by one or more
    of the following classes of securities: auto loans, student loans,
    credit card loans, equipment loans, floorplan loans, insurance premium
    finance loans, small business loans fully guaranteed as to principal
    and interest by the U.S. Small Business Association, receivables
    related to residential mortgage servicing advances (servicing advance
    receivables), or commercial mortgage loans. See generally id.
        \538\ See generally TALF Terms and Conditions, supra note 27.
        \539\ Federal Reserve Bank of New York, Term Asset-Backed
    Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/
    CMBS_recent_operations.html) (accessed Jan. 12, 2010) (hereinafter
    ``FRBNY CMBS Recent Operations''); Federal Reserve Bank of New York,
    Term Asset-Backed Securities Loan Facility: non-CMBS (online at
    www.newyorkfed.org/markets/talf_operations.html) (accessed Jan. 12,
    2010) (hereinafter ``FRBNY non-CMBS Recent Operations'').
        \540\ TALF has already been granted one extension, which authorized
    this program to continue beyond December 31, 2009, the original
    termination date. Board of Governors of the Federal Reserve System,
    Federal Reserve and Treasury Department Announce Extension to Term
    Asset-Backed Securities Loan Facility (TALF) (Aug. 17, 2009) (online at
    www.federalreserve.gov/newsevents/press/monetary/20090817a.htm).
        \541\ TALF Terms and Conditions, supra note 27.
    ---------------------------------------------------------------------------
        Treasury has currently committed up to $20 billion in TARP
    funds under the TALF.\542\ This amount is incrementally funded
    and, as of September 30, 2009, Treasury has only disbursed $100
    million under the program.\543\ In exchange for any amount
    disbursed, Treasury will receive a promissory note bearing
    interest at LIBOR plus 3 percent.\544\ Pursuant to an agreement
    to subordinate its debt, Treasury's loan will be repaid only
    after FRBNY's loans, if any, are paid in full with
    interest.\545\ This program is administered by FRBNY, and
    Treasury has limited discretion regarding its management.
    ---------------------------------------------------------------------------
        \542\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
        \543\ Agency Financial Statement 2009, supra note 32.
        \544\ U.S. Department of the Treasury, Credit Agreement among TALF
    LLC as Borrower, FEDERAL RESERVE BANK OF NEW YORK, as Controlling
    Party, FEDERAL RESERVE BANK OF NEW YORK, as the Senior Lender and
    UNITED STATES DEPARTMENT OF THE TREASURY, as the Subordinated Lender at
    12 (Mar. 3, 2009) (online at www.financialstability.gov/docs/SPV-
    Credit-Agt.pdf) (hereinafter ``TALF Credit Agreement'').
        \545\ TALF Credit Agreement, supra note 544. FRBNY's loans, if any,
    are secured by a first priority lien on all assets of the SPV. See U.S.
    Department of the Treasury, Security and Intercreditor Agreement among
    TALF LLC, as borrower, FEDERAL RESERVE BANK OF NEW YORK, as Senior
    Lender, UNITED STATES DEPARTMENT OF THE TREASURY, as Subordinated
    Lender, FEDERAL RESERVE BANK OF NEW YORK, as Controlling Party, and THE
    BANK OF NEW YORK MELLON, as Collateral Agent (Mar. 3, 2009) (online at
    www.financialstability.gov/docs/SPV-Sec-Agt.pdf).
    ---------------------------------------------------------------------------
        Because a TALF loan is non-recourse,\546\ if the borrower
    defaults, FRBNY cannot take action against the borrower.
    Instead, FRBNY takes ownership of the collateral. In turn,
    FRBNY sells the collateral to TALF, LLC,\547\ a special purpose
    vehicle (SPV) formed to facilitate this program. The SPV
    purchases the recovered collateral from FRBNY at a price equal
    to the defaulted TALF loan amount, plus accrued unpaid interest
    and fees.\548\ As of December 31, 2009, no TALF loans have
    defaulted, and the SPV contains only $100 million of Treasury's
    seed funding.\549\
    ---------------------------------------------------------------------------
        \546\ ``The TALF loan is non-recourse except for breaches of
    representations, warranties, and covenants, as further specified in the
    MLSA.'' TALF Frequently Asked Questions, supra note 536.
        \547\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
        \548\ TALF Terms and Conditions, supra note 27.
        \549\ Agency Financial Statement 2009, supra note 32, at 53.
    ---------------------------------------------------------------------------
        Treasury's $20 billion commitment to the TALF is to provide
    the initial funding of this SPV.\550\ To the extent the SPV
    purchases assets exceeding $20 billion, FRBNY will loan the SPV
    the additional funding. As mentioned above, FRBNY's loan to the
    SPV, if any, will be senior to Treasury's loan. To the extent
    there are any assets remaining in the SPV after both FRBNY and
    Treasury have been repaid, those assets will be shared equally
    between FRBNY and Treasury.\551\
    ---------------------------------------------------------------------------
        \550\ TALF Terms and Conditions, supra note 27.
        \551\ Board of Governors of the Federal Reserve System, Term Asset-
    Backed Securities Loan Facility (TALF) Terms and Conditions (online at
    www.federalreserve.gov/newsevents/press/
    monetary/monetary20081125a1.pdf) (hereinafter ``TALF Terms and
    Conditions'').
    ---------------------------------------------------------------------------
        Loans extended by Treasury and FRBNY to the SPV are due on
    the 10th anniversary of the credit agreement, subject to
    extension by FRBNY upon receipt of Treasury's consent.\552\
    Treasury has informed Panel staff that if an ABS sold to the
    SPV is underwater, the SPV will hold the asset until it
    appreciates in value before disposing of it, thereby increasing
    the likelihood of Treasury being repaid in full and with
    interest.\553\ While potentially maximizing taxpayer returns,
    this exit strategy may also have the effect of prolonging the
    winding down process and therefore Treasury's involvement in
    the market. Moreover, it will be the SPV created by FRBNY that
    will manage any assets it holds.\554\ Consequently, within the
    10-year period after the execution of the credit agreement,
    Treasury has little to no control over when its loan will be
    repaid.
    ---------------------------------------------------------------------------
        \552\ Assuming the agreement closed in 2009, FRBNY and Treasury
    loans would become due in 2019. The credit agreement is considered
    ``closed'' upon the satisfaction or waiver of certain preconditions
    stipulated therein. TALF Credit Agreement, supra note 544.
        \553\ Treasury conversations with Panel staff (June 24, 2009).
        \554\ Assuming the agreement closed in 2009, FRBNY and Treasury
    loans would become due in 2019. The credit agreement is considered
    ``closed'' upon the satisfaction or waiver of certain preconditions
    stipulated therein. TALF Credit Agreement, supra note 544.
    ---------------------------------------------------------------------------

    11. Small Business Programs

                a. Programs
        Treasury has yet to acquire any assets under its small
    business initiatives, but it has committed $15 billion in TARP
    funds out of the $35 billion it has allocated toward supporting
    small businesses so far, to potentially do so.\555\ Treasury's
    small business initiatives are three-pronged: $20 billion
    pledged as credit protection under the TALF, $15 billion
    directed to the purchase of Small Business Administration
    (SBA)-guaranteed securities, and a still-evolving initiative to
    provide capital assistance to small banks in return for
    commitments to lend to small businesses.\556\ As relates to the
    first two initiatives, Treasury may directly acquire assets
    should it elect to purchase SBA-guaranteed securities, but it
    will not receive assets from its TALF credit protection
    pledge.\557\ It is still unclear what assets, if any, Treasury
    may receive from its latest initiative.
    ---------------------------------------------------------------------------
        \555\ U.S. Department of the Treasury, Fact Sheet: Unlocking Credit
    for Small Businesses (Oct. 19, 2009) (online at
    www.financialstability.gov/roadtostability/unlockingCredit
    forSmallBusinesses.html) (hereinafter ``Small Business Fact Sheet'').
        \556\ Small Business Fact Sheet, supra note 555. Cf. U.S.
    Department of the Treasury, Consumer & Business Lending Initiative
    (July 17, 2009) (online at www.financialstability.gov/roadtostability/
    lendinginitiative.html) (hereinafter ``Consumer & Business Lending
    Initiative''); see White House, President Obama Announces New Efforts
    to Improve Access to Credit for Small Businesses (Oct. 21, 2009)
    (online at www.whitehouse.gov/assets/documents/
    small_business_final.pdf) (hereinafter ``President Obama Announces New
    Small Business Efforts'').
        \557\ Small Business Fact Sheet, supra note 555; see TALF Terms and
    Conditions, supra note 551 (accessed Jan. 12, 2010).
    ---------------------------------------------------------------------------
        Under the TALF, as noted above, Treasury provides up to $20
    billion of TARP funds as a credit backstop against first losses
    on FRBNY's overall $200 billion program commitment.\558\ At
    present, approximately $62 billion in TALF loans have been
    requested.\559\ For Treasury's backstop to be fully depleted,
    and for FRBNY to incur any loan losses subsequently, posted
    collateral would need to decline in value by more than one-
    third.
    ---------------------------------------------------------------------------
        \558\ Consumer & Business Lending Initiative, supra note 556.
        \559\ This figure includes both CMBS and non-CMBS loans requested
    as of December 3, 2009. See FRBNY CMBS Recent Operations, supra note
    539; FRBNY non-CMBS Recent Operations, supra note 539.
    ---------------------------------------------------------------------------
        Another of Treasury's small business initiatives calls for
    the purchase of up to $15 billion in securities backed by SBA
    loans: the government-guaranteed portion of SBA 7(a) loans and
    the non-government-guaranteed first-lien mortgage loans
    affiliated with the SBA's 504 loan program.\560\ Although an
    active secondary market traditionally allowed commercial
    lenders to sell the government-guaranteed portion of their 7(a)
    loans, providing lenders with new capital and allowing them to
    offer additional loans, beginning last fall, the secondary
    market for SBA-guaranteed securities froze.\561\ Unable to shed
    the risk from their books, commercial lenders significantly
    curtailed their lending activities.\562\ Treasury enacted this
    initiative in March 2009 to ``jumpstart credit markets for
    small businesses.'' \563\
    ---------------------------------------------------------------------------
        \560\ Small Business Fact Sheet, supra note 555. Under its 7(a)
    Loan Program, the Small Business Administration (SBA) guarantees a
    portion of qualified loans made and administered by commercial lenders.
    The SBA does not make 7(a) loans, nor fully guarantee them--the lender
    and SBA share the risk that a borrower will not fully repay the loan.
    U.S. Small Business Administration, SBA Programs Office (online at
    www.sba.gov/financialassistance/borrowers/
    guaranteed/7alp/index.html) (accessed Nov. 24, 2009).
        \561\ From 2006 through 2008, between 40 and 45 percent of the SBA
    guaranteed portion of 7(a) loans were sold into the secondary market.
    See Government Accountability Office, Small Business Administration's
    Implementation of Administrative Provisions in the American Recovery
    and Reinvestment Act of 2009, at 6 (Apr. 16, 2009) (online at
    www.gao.gov/new.items/d09507r.pdf); Congressional Oversight Panel, May
    Oversight Report: Reviving Lending to Small Businesses and Families and
    the Impact of the TALF, at 52 (May 7, 2009) (online at cop.senate.gov/
    documents/cop-050709-report.pdf) (referring to the market freezing
    because of (1) the tightening of the Prime versus LIBOR spread, which
    reduced the attractiveness of investment in securitized 7(a) loans
    (indeed, the return for investors had disappeared); (2) the strained
    capacity of broker-dealers, who were unable to sell their current
    inventory and thereby free up capital to buy and pool additional loans;
    (3) the reduced access to and increased cost of credit for broker-
    dealers, who could not sell off inventory to pay off existing loans;
    and (4) general uncertainty and fear in the marketplace).
        \562\ Small Business Fact Sheet, supra note 555.
        \563\ Small Business Fact Sheet, supra note 555.
    ---------------------------------------------------------------------------
        Under the initiative, Treasury hired Earnest Partners, an
    independent investment manager with SBA-guaranteed loan
    experience, to guide its efforts to buy the securities.\564\
    Unlike the TALF, Treasury's program to purchase SBA-guaranteed
    securities does not utilize private-sector pricing. Rather,
    Treasury may purchase securities directly from ``pool
    assemblers'' and banks.\565\ According to Treasury's
    implementation documents, ``Treasury and its investment manager
    will analyze the current and historical prices for these
    securities'' in order to ``identify opportunities to purchase
    the securities at reasonable prices.'' \566\ Treasury defines
    such prices as those that fulfill the dual objective of
    ``[providing] sufficient liquidity to encourage banks to
    increase their small business lending and [protecting]
    taxpayers' interest.'' \567\
    ---------------------------------------------------------------------------
        \564\ U.S. Department of the Treasury, Financial Agency Agreement
    for Asset Management Services for SBA Related Loans and Securities
    (Mar. 16, 2009) (online at www.financialstability.gov/docs/
    ContractsAgreements/TARP%20FAA%20SBA%20Asset%20Manager%20-
    %20Final%20to%20 be%20posted.pdf) (updated Nov. 12, 2009); See SIGTARP,
    Quarterly Report to Congress, at 112 (Apr. 21, 2009) (online at
    www.sigtarp.gov/reports/congress/2009/
    April2009_Quarterly_Report_to_Congress.pdf).
        \565\ Pursuant to EESA, Treasury expects to receive warrants from
    the pool assemblers as additional consideration for the purchase of
    7(a) and 504 first-lien securities. The pricing and exact nature of the
    warrants is still under consideration by Treasury. U.S. Department of
    the Treasury, Unlocking Credit for Small Businesses: FAQ on
    Implementation (Mar. 17, 2009) (online at www.financialstability.gov/
    docs/FAQ-Small-Business.pdf) (hereinafter ``Unlocking Credit for Small
    Businesses: FAQ on Implementation'').
        \566\ Id.
        \567\ Id.
    ---------------------------------------------------------------------------
        Treasury has $3 billion apportioned for its direct purchase
    program, and despite stating 7(a) and 504 purchases would begin
    by May 2009, Treasury has not yet made any purchases under the
    program.\568\ A rejuvenated secondary market for SBA loans, as
    Treasury previously noted, has tempered the need for an earlier
    start to the program.\569\ If Treasury does engage in direct
    purchases, it plans to either sell the securities to private
    investors or pursue a buy-and-hold strategy, depending on
    market conditions.\570\
    ---------------------------------------------------------------------------
        \568\ Government Accountability Office, Troubled Asset Relief
    Program: One Year Later, Actions are Needed to Address Remaining
    Transparency, and Accountability Challenges, at 80 (Oct. 8, 2009)
    (online at www.gao.gov/new.items/d1016.pdf); Unlocking Credit for Small
    Businesses: FAQ on Implementation, supra note 565.
        \569\ Between May and October, the total volume of loans settled
    from lenders to broker averaged $344 million, exceeding pre-crisis
    levels. By comparison, in January total volume was $85.9 million. U.S.
    Department of the Treasury, SBA Host Small Business Financing Forum
    (Nov. 18, 2009) (online at www.financialstability.gov/latest/tg--
    11182009.html) (hereinafter ``SBA Host Small Business Financing
    Forum''). See also Unlocking Credit for Small Businesses: FAQ on
    Implementation, supra note 565.
        \570\ SBA Host Small Business Financing Forum, supra note 569.
    ---------------------------------------------------------------------------
        On October 21, 2009, the White House announced a third
    small business lending initiative, part of which uses TARP
    funds. Under this initiative, Treasury will provide low-cost
    capital to community banks to be used in small business
    lending.\571\ Participating banks must submit small business
    lending plans and will be required to submit quarterly reports
    describing their small business lending activities. If their
    lending plans are accepted, banks will have access to capital
    at a dividend rate of 3 percent, more attractive terms than the
    5 percent rate under the CPP. These small banks will be able to
    receive capital totaling up to 2 percent of their risk weighted
    assets.\572\ For community development financial institutions
    that can document that 60 percent of their small business
    lending targets low income communities or underserved
    populations,\573\ this dividend rate will be only two percent.
    As currently conceived,\574\ this capital will be available
    after the bank submits a small business lending plan, and may
    only be used to make qualifying small business loans.\575\
    Further implementing details for this program have not been
    announced as of the release of this report.
    ---------------------------------------------------------------------------
        \571\ Small- and medium-sized banks are seen as effective vehicles
    for supporting small business lending because banks with less than $1
    billion in assets hold greater proportions of small business loans to
    all business loans. See President Obama Announces New Small Business
    Efforts, supra note 556.
        \572\ See id.
        \573\ Community development financial institutions, which are
    certified by the federal government, provide loans to underserved
    communities.
        \574\ See President Obama Announces New Small Business Efforts,
    supra note 556.
        \575\ See id.
    ---------------------------------------------------------------------------
                b. Future Considerations
        Small businesses continue to experience an inability to
    access credit.\576\ Treasury has indicated that measures to
    ``get credit to small businesses'' will be a key driver in
    Treasury's economic recovery strategy.\577\ At the Panel's
    December hearing, Secretary Geithner stated that new TARP
    investments would be limited to ``housing, small business, and
    securitization markets that facilitate consumer and small
    business loans.'' \578\ In the process of doing so, the
    Secretary noted, Treasury is ``reserving funds for additional
    efforts to facilitate small business lending.'' \579\
    ---------------------------------------------------------------------------
        \576\ See U.S. Department of the Treasury, Report to the President
    Small Business Financing Forum (Dec. 3, 2009 (online at
    www.financialstability.gov/docs/Small%20Business%
    20Financing%20Forum%20Report%20FINAL.PDF) (hereinafter ``Report to the
    President Small Business Financing Forum'').
        \577\ Agency Financial Statement 2009, supra note 32.
        \578\ Id.
        \579\ Id.
    ---------------------------------------------------------------------------
        Treasury, in coordination with the SBA, held a Small
    Business Financing Forum on November 18, 2009, convening
    ``entrepreneurs, small business owners, lenders, policymakers
    and regulators to assess additional ways to spur small business
    growth.'' \580\ Secretary Geithner delivered a summary of
    participant views and recommendations to President Obama on
    December 3, 2009.
    ---------------------------------------------------------------------------
        \580\ See Report to the President Small Business Financing Forum,
    supra note 576.
    ---------------------------------------------------------------------------
        As of the date of this report, it is still unclear which
    proposals, if any, the Administration is considering, and
    Treasury has not allocated additional TARP funds to support new
    small business initiatives beyond those discussed above.\581\
    It is possible, however, that small business initiatives will
    result in Treasury's acquisition of additional assets. As
    Secretary Geithner noted at the Panel's December hearing, small
    banks have been reluctant to participate in Treasury's recent
    low-cost-capital initiative for fear of being stigmatized or
    having operating conditions attached.\582\ Because community
    bank lending is tied to small business growth, which often
    feeds job creation, Treasury's success in tailoring its small
    business programs to facilitate such lending will be essential
    to the success of Treasury's adapted TARP strategy.
    ---------------------------------------------------------------------------
        \581\ Senator Mark Warner has also offered a proposal calling for
    the reallocation of up to $40 billion in unused TARP funds to create a
    small business loan fund. Participating regional and community banks
    would be required to contribute up to $10 billion and assume first-
    dollar losses on the loans. On October 21, 2009, Senator Warner sent
    President Obama a letter signed by 32 Senate colleagues seeking
    Administration backing for the proposal. Letter from Senator Mark R.
    Warner to President Barack Obama (Oct. 21, 2009).
        \582\ See Agency Financial Statement 2009, supra note 32.
    ---------------------------------------------------------------------------
        Moving forward, as other TARP programs wind down, Treasury
    should be transparent about its eventual exit plans for
    programs that are not yet under way.

                     E. Unwinding TARP Expenditure Programs

        Some of Treasury's TARP initiatives will neither generate
    fees, nor acquire assets with the potential to increase in
    value. These initiatives constitute non-recoverable
    expenditures from the TARP, whereby Treasury can only realize
    monetary losses on these programs. To date, this exposure
    relates solely to Treasury's mortgage foreclosure mitigation
    efforts, including disbursements or potential disbursements,
    made under Treasury's HAMP initiative and its subprograms, but
    may also apply to the small business initiatives discussed
    above.\583\ HAMP is the largest of the Making Home Affordable
    programs and presents the most exposure for monetary losses. As
    Secretary Geithner noted of HAMP at the Panel's December 10,
    2009 hearing, ``expenditures through [HAMP] were never intended
    to generate revenue.'' \584\ Rather, HAMP ``was created to help
    mitigate foreclosure for responsible but at-risk homeowners.''
    \585\
    ---------------------------------------------------------------------------
        \583\ In keeping with the scope of this report, this section
    examines only Treasury's monetary exposure related to its mortgage
    foreclosure mitigation programs. For an in-depth assessment of
    Treasury's mortgage foreclosure mitigation efforts, see the Panel's
    October 2009 report. See Congressional Oversight Panel, October
    Oversight Report: An Assessment of Foreclosure Mitigation Efforts After
    Six Months (Oct. 9, 2009) (online at cop.senate.gov/documents/cop-
    100909-
    report.pdf) (hereinafter ``COP October Oversight Report''); see also
    COP December Oversight Report, supra note 514.
        \584\ Agency Financial Statement 2009, supra note 32.
        \585\ Id.; OFS FY09 Financial Statements, supra note 133, at 3.
    (``In particular, the $50 billion Home Affordable Modification Program
    or `HAMP,' is not designed to recoup money spent on loan modifications
    to keep people in their homes.'')
    ---------------------------------------------------------------------------

    1. HAMP

        Under HAMP, Treasury allocated up to $50 billion from the
    TARP to modify private-label mortgages. To prevent
    foreclosures, Treasury shares the cost of reducing monthly
    payments on certain delinquent loans and provides targeted
    incentives to borrowers, investors, and servicers that
    participate in the program.\586\ Treasury currently estimates
    it will spend $48.756 billion for private-label loans under
    HAMP. Of the initial $50 billion allocation, $1.244 billion
    will never be obligated due to the fact that TARP authority was
    reduced by this amount under the Helping Families Save their
    Home Act. Treasury has currently obligated $35.5 billion of the
    amount, reflecting Treasury's legal commitments to 102
    servicers as of December 31, 2009.\587\ Due to HAMP's payment
    structure, including delayed payments and a long disbursement
    cycle, only a fraction of TARP funds have been paid out to
    date.\588\
    ---------------------------------------------------------------------------
        \586\ U.S. Department of the Treasury, Making Home Affordable
    Updated Detailed Program Description (Mar. 4, 2009) (online at
    www.treas.gov/press/releases/reports/housing_fact_sheet.pdf)
    (hereinafter ``MHA Program Description'').
        \587\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
        \588\ OFS FY09 Financial Statements, supra note 133. (Treasury's FY
    2009 net cost of operations of $41.6 billion includes the estimated net
    cost related to loans, equity investments, and asset guarantees. Due to
    its program structure, the $50 billion HAMP has delayed payments as
    well as a long disbursement cycle so the FY 2009 amounts include only
    $2 million in cost.)
    ---------------------------------------------------------------------------
        HAMP provides lenders/investors with cost-share payments
    for up to five years for half the cost of reducing a borrower's
    payment from 38 percent to 31 percent of the borrower's gross
    monthly income.\589\ Investors must pay for reducing the
    borrower's payment down to the 38 percent threshold before they
    are able to benefit from the cost-share incentive.\590\
    ---------------------------------------------------------------------------
        \589\ MHA Program Description, supra note 586.
        \590\ MHA Program Description, supra note 586.
    ---------------------------------------------------------------------------
        HAMP also provides targeted incentive payments for first-
    and second-lien mortgage modifications. On first-lien
    mortgages, targeted incentives include an up-front payment of
    $1,000 to the servicer for each successful modification
    following the completion of the borrower's trial period, and
    ``pay for success'' fees of up to $1,000 annually for three
    years if the borrower remains current.\591\ Additional one-time
    incentives include $500 to servicers and $1,500 to investors if
    loans are successfully modified for distressed borrowers who
    are current but are in danger of imminent default.\592\
    Homeowners also earn up to $1,000 towards principal balance
    reduction annually for five years contingent on their remaining
    current with payments.\593\ Treasury estimates that up to 50
    percent of at-risk mortgages have second liens.\594\ In order
    to address second lien debts, such as home equity lines of
    credit or second mortgages, HAMP encourages servicers to
    contact second lien holders and negotiate the extinguishment of
    the second lien.\595\ Servicers are eligible to receive
    payments of $500 per second lien modification, as well as
    success payments of $250 per year for three years, provided the
    modified first loan remains current.\596\ Borrowers also
    receive success payments for participating of $250 per year for
    up to five years that are used to pay down the principal on the
    first lien.\597\
    ---------------------------------------------------------------------------
        \591\ MHA Program Description, supra note 586.
        \592\ Imminent default determinations are made by servicers based
    on the borrower's financial condition in light of hardship as well as
    the condition of and circumstances affecting the property securing the
    mortgage. U.S. Department of the Treasury, Supplemental Documentation--
    Frequently Asked Questions Home Affordable Modification Program (Nov.
    12, 2009) (online at www.hmpadmin.com/portal/docs/hamp_servicer/
    hampfaqs.pdf) (hereinafter ``Supplemental Documentation for HAMP'').
        \593\ MHA Program Description, supra note 586.
        \594\ U.S. Department of the Treasury, Making Home Affordable:
    Program Update (Apr. 28, 2009) (online at www.financialstability.gov/
    docs/042809SecondLienFactSheet.pdf) (hereinafter ``Making Home
    Affordable: Program Update'').
        \595\ Id.
        \596\ Id.
        \597\ Id.
    ---------------------------------------------------------------------------
        Treasury utilizes mortgage servicers to carry out the
    process of modifying mortgages. In exchange for agreeing to
    follow Treasury's standardized guidelines and process,
    participating servicers are eligible for the various program
    incentive payments. Under the Servicer Participation
    Agreements, Treasury has authorized each participating servicer
    to modify mortgages through December 31, 2012. Because
    mortgages will continue to be modified past the October 2010
    expiration of TARP, it is important to consider how various
    aspects of the program will function.
        HAMP modifications begin with a three-month trial
    modification period for eligible borrowers, although the
    maximum trial period was recently extended to allow borrowers
    additional time to provide necessary documentation. After three
    months of successful payments at the modified rate and
    provision of full supporting documentation, the modification
    becomes permanent. December 31, 2012 will be the last date upon
    which servicers can commence a new trial modification. Under
    current program guidelines, the last date for a possible
    conversion to permanent status is May 1, 2013.
        Presuming a HAMP modification remains current, incentive
    payments will extend into the future for five years after the
    trial modification converts to permanent status, long past the
    scheduled expiration of the TARP. Based on the final date for a
    modification to become permanent, servicer incentive payments
    could continue until May 1, 2016, and borrower incentive
    payments could continue until May 1, 2018. Following the
    expiration of TARP and following the expiration of servicers'
    authority to continue making new modifications, scheduled
    payments will continue to be made by Fannie Mae, Treasury's
    financial agent, as they are currently. HAMP payments are made
    to servicers monthly via wire transfer in a consolidated
    manner.\598\ Payments are remitted to servicers either for
    themselves or on behalf of borrowers and investors.\599\
    Servicers apply payments made to borrowers directly to reducing
    the principal of the borrower's mortgage.\600\ Cost-share
    payments to investors/security holders accrue monthly as of the
    completed modification, not from the start of the trial period.
    Servicers are responsible for delivering these payments to the
    appropriate investors/security holders.\601\
    ---------------------------------------------------------------------------
        \598\ Monthly incentive payments are distributed on a consolidated
    basis, rather than by individual loan. Supplemental Documentation for
    HAMP, supra note 592, at 25.
        \599\ Fannie Mae provides loan-level accounting for the incentives.
    Id.
        \600\ Making Home Affordable: Program Update, supra note 594.
        \601\ Treasury is not providing guidance on how those funds are to
    be passed through to security holders of securitization trusts.
    ---------------------------------------------------------------------------
        Treasury anticipates that HAMP expenses will increase
    significantly over time, ``as more modifications of mortgage
    payments are finalized between mortgage servicers and
    borrowers, resulting in increased incentive payments.'' \602\
    As more money flows, the need for strong oversight becomes even
    more important. Freddie Mac serves as Treasury's compliance
    agent and monitors servicer payments to ensure the proper
    remittance of funds to investors/security holders and the
    proper application of funds to borrowers' accounts.\603\
    Freddie Mac will continue in this role after the expiration of
    the TARP.
    ---------------------------------------------------------------------------
        \602\ See Agency Financial Statement 2009, supra note 32 (``We need
    to continue to find ways to help mitigate foreclosures for responsible
    homeowners . . .'').
        \603\ Supplemental Documentation for HAMP, supra note 592, at 25.
    ---------------------------------------------------------------------------
        Payments under HAMP are contingent on borrowers remaining
    in ``good standing.'' A borrower loses good standing when an
    amount equal to three full monthly payments is due and unpaid
    on the last day of the third month in which payments were due.
    If this occurs, good standing cannot be restored, and the
    borrower permanently loses eligibility to receive further
    incentives and reimbursements under HAMP. A borrower who fails
    a HAMP modification is not eligible for another HAMP offer,
    even if the borrower fully cures the delinquency. However, the
    servicer is obligated to work with the borrower to attempt to
    cure their delinquency. If a cure cannot be reached, the
    servicer must consider the borrower for ``any other home
    retention loss mitigation options that may be available.'' If
    those options are unsuccessful, a short sale or deed-in-lieu
    must be considered.\604\ Notwithstanding any future changes
    Treasury may make to the program, provisions addressing
    troubled modifications and redefaults will not change following
    the expiration of the TARP or the cessation of additional
    modifications.
    ---------------------------------------------------------------------------
        \604\ Supplemental Documentation for HAMP, supra note 592, at 25.
    ---------------------------------------------------------------------------
        The October 2010 expiration of TARP will have one notable
    effect on the foreclosure mitigation programs by freezing the
    maximum number of modifications, even though the program will
    continue to operate. The funds available to pay servicer,
    borrower, and investor payments are capped based upon each
    servicer's Servicer Participation Agreement.\605\ Treasury
    established the amount in each servicer's initial program
    participation cap by ``estimating the number of HAMP
    modifications expected to be performed by each servicer during
    the term of the HAMP.'' \606\ Once a servicer's cap is reached,
    a servicer cannot ``enter into any agreements with borrowers
    intended to result in new loan modifications, and no payments
    will be made with respect to any new loan modifications.''
    \607\ Treasury, at its sole discretion, can adjust a servicer's
    cap based on an updated estimate of the number of HAMP
    modifications the servicer is expected to perform.\608\ For
    example, the total initial allocation to servicers was $23.6
    billion, but the various allocations have been increased by a
    total of $11.9 billion to the current cap of $35.5 billion.
    However, Treasury will only commit funds to servicers until
    TARP's October 2010 expiration.\609\ This means that after
    October 3, 2010, the maximum amount each servicer is authorized
    to modify under HAMP will be locked into place, and Treasury
    can no longer increase a servicer's cap, only decrease it,
    through the end of the program.
    ---------------------------------------------------------------------------
        \605\ U.S. Department of the Treasury, Supplemental Directive 09-01
    Introduction of the Home Affordable Modification Program, at 23 (online
    at www.hmpadmin.com/portal/docs/hamp_servicer/sd0901.pdf) (hereinafter
    ``Supplemental Directive for HAMP'').
        \606\ Id.
        \607\ Id.
        \608\ Id.
        \609\ U.S. Department of the Treasury, Making Home Affordable
    Borrower Frequently Asked Questions, at 11 (July 16, 2009) (online at
    www.financialstability.gov/docs/borrower_qa.pdf).
    ---------------------------------------------------------------------------

    2. Future Considerations

        Moving forward, Treasury has stated that its focus will
    remain on foreclosure mitigation as a key part of its new TARP
    commitment strategy.\610\ The prospect of future initiatives
    raises important questions about future expenditures,
    timetables, management, supervision and enforcement, in
    addition to Treasury's relationship to servicers and borrowers
    going forward. At this time, Treasury has not announced any
    changes to the foreclosure mitigation programs on these points.
    Further, as noted in the Panel's October 2009 report, the
    foreclosure problem is far from abating, and with rising
    unemployment, widespread deep negative equity, and recasts on
    payment-option adjustable rate mortgages and interest-only
    mortgages increasing in volume, there is no immediate sign of a
    resolution to the foreclosure crisis in sight.\611\ While
    Treasury has structured the Servicer Participation Agreements
    to allow servicers to modify mortgages through 2012, it is
    unclear that Treasury would have the authority to introduce any
    new foreclosure initiatives or make changes to existing
    programs past the October 2010 expiration of the TARP.
    Therefore, should Treasury intend to make changes to address
    these matters, the changes would need to be implemented
    relatively soon.
    ---------------------------------------------------------------------------
        \610\ See Agency Financial Statement 2009, supra note 32; Sec.
    Geithner Written Testimony, supra note 32, at 5 (``Second, we must
    fulfill EESA's mandate to preserve home ownership, stimulate liquidity
    for small businesses, and promote jobs and economic growth. To do so,
    we will limit new commitments in 2010 to three areas. We will continue
    to mitigate foreclosure for responsible American homeowners as we take
    the steps necessary to stabilize our housing market'').
        \611\ See COP October Oversight Report, supra note 583.
    ---------------------------------------------------------------------------
        Treasury identified its key challenges related to HAMP
    going forward as three-fold: To reach more eligible borrowers,
    to help borrowers convert more modifications from trial to
    permanent, and to increase transparency to assure the public
    that the program is helping homeowners as intended.\612\ Of
    these objectives, borrower conversions is the ``central
    focus.'' \613\ HAMP was not designed to address foreclosures
    caused by unemployment, which now appears to be a central cause
    of nonpayment. Testifying before the House Financial Services
    Committee in December, Assistant Secretary Allison stated:
    ---------------------------------------------------------------------------
        \612\ House Financial Services Committee, Written Testimony of
    Assistant Secretary Herbert Allison, The Private Sector and Government
    Response to the Mortgage Foreclosure Crisis 111th Cong. (Dec. 8, 2009)
    (online at www.house.gov/apps/list/hearing/financialsvcs_dem/
    herb_allison.pdf).
        \613\ Id.

            While our key focus is on helping as many borrowers as
            quickly as possible under the current program, Treasury
            recognizes that unemployment presents unique challenges
            and is still actively reviewing various ideas and
            suggestions in order to improve implementation and
            effectiveness of the program in this area.\614\
    ---------------------------------------------------------------------------
        \614\ Id.

        Finally, as Treasury winds down the foreclosure mitigation
    programs under the TARP, it must be cognizant of the
    intersection of these programs with other non-TARP programs and
    initiatives, which may also be unwound or changed. For example,
    the Federal Reserve's monetary policy has produced low interest
    rates, which have stimulated greater demand for mortgage
    financed home purchases by lowering the cost of capital, and
    federal government support for the GSEs and the private label
    mortgage backed securities market has also contributed to
    liquidity and thus lowered the costs of mortgage capital. This
    level of support cannot continue indefinitely, however, and as
    long as foreclosures and real estate owned inventory flood the
    housing market and contribute to an oversupply of housing stock
    for sale, there will be strong downward pressure on home
    prices.

         F. What Remains and What Additional Assets Might Be Acquired?

        Set forth above in Sections D and E is a summary of the
    TARP initiatives that are open and closed to new expenditures.
    As of December 30, 2009, $65.5 billion of TARP funds have been
    committed and not used and $336.2 billion of TARP funds remains
    uncommitted.\615\ On December 10, 2009, Secretary Geithner
    announced that Treasury will continue to wind down programs put
    in place to address the crisis. During the fourth quarter of
    2009, the CPP ended. New TARP commitments in 2010 will be in
    three areas:
    ---------------------------------------------------------------------------
        \615\ See Figure 22.
    ---------------------------------------------------------------------------
               Continuing foreclosure mitigation; \616\
    ---------------------------------------------------------------------------
        \616\ For further discussion, see Section E, infra.
    ---------------------------------------------------------------------------
               Providing capital to small and community
            banks and reserve funds to facilitate small business
            lending; \617\ and
    ---------------------------------------------------------------------------
        \617\ For further discussion, see Section D.11, infra.
    ---------------------------------------------------------------------------
               Increasing commitment to the TALF.\618\
    ---------------------------------------------------------------------------
        \618\ For further discussion, see Section D.10, infra.
    ---------------------------------------------------------------------------
        In addition, if passed, the following proposed legislation
    includes several provisions that would impact the TARP.
        H.R. 4173, the Wall Street Reform and Consumer Protection
    Act of 2009, passed the House of Representatives on December
    11, 2009 by a vote of 223 to 202.\619\ The bill includes a
    series of measures that would comprehensively reform the U.S.
    financial regulatory structure. In addition, the bill includes
    the following TARP provisions:
    ---------------------------------------------------------------------------
        \619\ Wall Street Reform and Consumer Protection Act of 2009, H.R.
    4173, 111th Cong. (2009).
    ---------------------------------------------------------------------------
               The bill would reduce the maximum allowable
            amount outstanding under TARP by $20.8 billion and use
            the money to offset the excess costs of the bill.\620\
    ---------------------------------------------------------------------------
        \620\ Congressional Budget Office, Cost Estimate of H.R. 4173, Wall
    Street Reform and Consumer Protection Act of 2009 (Dec. 9, 2009)
    (online at www.cbo.gov/ftpdocs/108xx/doc10844/hr4173asreported.pdf).
    ---------------------------------------------------------------------------
               An amendment offered by Rep. Barney Frank
            (D-MA), adopted by a vote of 240 to 182, would
            authorize Treasury to transfer $3 billion in funds
            available under EESA to the Department of Housing and
            Urban Development (HUD) to provide emergency low-
            interest loans to unemployed homeowners in need of
            assistance in making mortgage payments and $1 billion
            to HUD's Neighborhood Stabilization Program to assist
            states and local governments with the redevelopment of
            abandoned and foreclosed homes.\621\
    ---------------------------------------------------------------------------
        \621\ Representative Barney Frank, Wall Street Reform and Consumer
    Protection Act of 2009, Congressional Record Vol. 155, No. 186: p.
    H14663-14664 (Dec. 10, 2009) (online at frwebgate.access.gpo.gov/cgi-
    bin/getpage.cgi?position=all&page=H14663&dbname=2009_record).
    ---------------------------------------------------------------------------
               Section 134 of EESA states that should TARP
            realize a net loss, ``the President shall submit a
            legislative proposal that recoups from the financial
            industry an amount equal to the shortfall in order to
            ensure that the Troubled Asset Relief Program does not
            add to the deficit or national debt.'' An amendment
            offered by Rep. Gary Peters (D-MI), adopted by a vote
            of 225-198, would authorize the FDIC to make
            assessments on large financial institutions to
            compensate for any such TARP shortfall.\622\
    ---------------------------------------------------------------------------
        \622\ Rep. Gary Peters, Amendment to the Wall Street Reform and
    Consumer Protection Act of 2009, Congressional Record, H14748-14750
    (Dec. 11, 2009) (online at www.congress.gov/cgi-lis/query/D?r111:1:./
    temp/r111kAWb3J::).

    The Senate Committee on Banking, Housing & Urban Affairs
    expects to mark up its version of this bill at the end of
    January 2010.
        H.R. 2847, Jobs for Main Street Act of 2010, passed the
    House of Representatives on December 16, 2009, by a vote of 217
    to 212.\623\ The bill, which originated as the FY 2010
    Commerce-Justice-Science appropriations bill, authorizes $154
    billion for job creation and the extension of unemployment
    benefits. The bill would reduce the maximum amount outstanding
    under the TARP by $150 billion and redirect $75 billion to
    create new jobs through infrastructure projects ($48.3 billion)
    and prevent layoffs of state and local employees ($26.7
    billion).\624\ The remaining $79 billion in spending, not
    funded through the TARP, would pay for the extension of
    unemployment benefits and health insurance aid for the jobless,
    measures that were included in the $787 billion economic
    stimulus package (Pub. L. 111-5) earlier this year. The Senate
    is expected to act on this bill in January 2010.\625\
    ---------------------------------------------------------------------------
        \623\ Jobs for Main Street Act, H.R. 2847, 111th Cong. (2009).
        \624\ In its March 2009 baseline projection, the Congressional
    Budget Office (CBO) estimated that Treasury would use all of the
    spending authority available under the TARP. That baseline was adopted
    as the Congress' budget resolution baseline for scorekeeping purposes
    and is used by CBO for estimating the budgetary impact of legislation
    until the Congress adopts a new baseline for scorekeeping purposes.
    Using the March baseline's estimated average subsidy of 50 percent for
    the use of uncommitted TARP authority, the bill's proposed reduction in
    authority of $150 billion would result in outlay savings of $75 billion
    which would be redirected toward job creation initiatives.
        \625\ Geof Koss, House-Passed Jobs Measure Will Wait, CQ Weekly
    (Dec. 28, 2009).
    ---------------------------------------------------------------------------

             G. Unwinding Implicit Guarantees in a Post-TARP World

        There are two kinds of tools available to counteract the
    effects of implicit guarantees.\626\ One is to regulate the
    institutions that are the beneficiaries of such risks in order
    to minimize the impact of the guarantees. The second is to
    create a credible system in which such institutions could be
    liquidated or otherwise reorganized so that failure is a real
    possibility.\627\ The options may work alone or in concert. In
    the following section, this report lays out several options
    that have been discussed by various commentators, and describes
    legislative proposals by Congress and the current
    Administration. The Panel does not take a position as to
    whether any of these options are advisable; the sole purpose in
    describing the options available is to provide a brief survey
    of current thought on this issue.
    ---------------------------------------------------------------------------
        \626\ It is important to note that implicit guarantees from
    government subsidization or sponsorship exist in numerous markets. For
    example, before the mortgage crisis, Government Sponsored Enterprises
    (GSEs) such as Fannie Mae were thought to be shielded from aggregate
    credit risks by implicit government backing, allowing them to take on
    debt at rates below those paid by private institutions. See Karsten
    Jeske & Dirk Kreuger, Housing and the Macroeconomy: The Role of
    Implicit Guarantees for Government-Sponsored Enterprises, Federal
    Reserve Bank of Atlanta Working Paper 2005-15 (Aug. 2005) (online at
    papers.ssrn.com/sol3/
    papers.cfm?abstract_id=811004). Some economists have argued that such
    implicit guarantees contributed to the mortgage crisis. See Vernon L.
    Smith, The Clinton Housing Bubble, Wall Street Journal (Dec. 18, 2007)
    (online at online.wsj.com/article/SB119794091743935595.html). This
    report, however, addresses the effects of TARP and its aftermath and so
    is limited in scope to the concerns created by the implicit guarantee
    to large financial institutions.
        \627\ The Panel made a number of recommendations on this topic in
    its special report on regulatory reform. Congressional Oversight Panel,
    Modernizing the American Financial Regulatory System: Recommendations
    for Improving Oversight, Protecting Consumers, and Ensuring Stability
    (Jan. 29, 2009) (online at cop.senate.gov/reports/library/report-
    012909-cop.cfm).
    ---------------------------------------------------------------------------

    1. Regulatory Options

        The regulatory options most often discussed at present
    include the following broad categories:
                a. Limitations on Size
        One school of thought holds that size alone is a threat to
    the system.\628\ The proponents of this theory point out that
    just four of the 8,100 or so U.S. banks control nearly 40
    percent of the deposits in the U.S. banking system,\629\ that
    as of September 30, 2009, the four largest banks held 37.9
    percent of all domestic assets,\630\ and that a collapse of any
    one of them could bring down the banking system, if not large
    portions of the economy.\631\ While JPMorgan Chase CEO Jamie
    Dimon argues that a regulatory system could be created to deal
    with the failure of very large banks, as the FDIC deals with
    failed commercial banks,\632\ the ``just too big'' school
    points out that the FDIC system is predicated on the existence
    of bigger banks that can take over the assets of failed
    commercial banks, and that no entity exists that can take over
    a failed very large bank, except the U.S. government.\633\
    Among the proponents of this argument is former Federal Reserve
    Chairman Alan Greenspan, who maintains that the solution to the
    too big to fail problem will require ``radical things,'' such
    as the forced break-up of very large banks, just as Standard
    Oil was broken up in 1911.\634\ Without such action, Mr.
    Greenspan believes the implicit subsidy provided to very large
    firms will result in ``a moribund group of obsolescent
    institutions, which will be a big drain on the savings of this
    society.'' \635\ David Moss, the John G. McLean Professor of
    Business Administration at Harvard Business School, suggests an
    alternative solution to the too big to fail problem in which
    federal officials identify financial institutions whose failure
    would pose a systemic threat to the broader financial system
    and submit such institutions to increased oversight and
    mandatory federal insurance.\636\
    ---------------------------------------------------------------------------
        \628\ This seems to be the belief in Europe. Several large,
    struggling financial institutions have instead been forced to sell off
    business units, leaving the parent companies smaller but, ostensibly,
    stronger. Most notably, Royal Bank of Scotland PLC in the UK, ABN Amro
    in the Netherlands, and Dexia SA in Belgium have all recently announced
    planned sell-offs. See The Royal Bank of Scotland, RBS Announces
    Successful Sale of RBS Asset Management Fund Management Assets (Jan. 8,
    2010) (online at www.rbs.com/media/news/press-releases/2010-press-
    releases/2010-01-08-asset-finance-sale.ashx) (quoting the RBS Group's
    CFO, Bruce Van Suan as saying ``This transaction represents another
    step in our plan to restructure RBS around its core customer
    franchises''); Ministry of Finance of the Netherlands, Government
    Clears the Way for Integration of ABN Amro and Fortis Bank Netherlands
    (Nov. 19, 2009) (online at www.minfin.nl/english/News/Newsreleases/
    2009/11/Government_clears_the_way_for_integration_of_ABN_
    AMRO_and_Fortis_Bank_Nederland) (citing letter from Dutch Minister of
    Finance to the Dutch Lower House of Parliament stating that ``the
    hiving off of business units is necessary''); Dexia, Societe General
    and Dexia Complete the Credit du Nord Transaction (Dec. 11, 2009)
    (online at www.dexia.com/docs/2009/2009_news/
    20091210_credit_nord_UK.pdf) (noting that Dexia's divestiture of its 20
    percent stake in Credit du Nord is part of the Dexia Group's
    restructuring plan).
        \629\ These banks are Citigroup, Bank of America, Wells Fargo, and
    JPMorgan.
        \630\ Specifically, four banks accounted for 37.9 percent of the
    assets of all insured U.S.-chartered commercial banks with assets of at
    least $300 million. See Board of Governors of the Federal Reserve
    System, Large Commercial Banks (online at www.federalreserve.gov/
    releases/lbr).
        \631\ See, e.g., Joint Economic Committee, Written Testimony of
    Joseph Stiglitz, Professor, Columbia University, Too Big to Fail or Too
    Big to Save? Examining the Systemic Threats of Large Financial
    Institutions, 111th Cong., at 2-3 (Apr. 21, 2009) (online at
    jec.senate.gov/index.cfm?FuseAction=Files.View&FileStore`id=6b50b609-
    89fa-4ddf-a799-2963b31d6f86).
        \632\ Jamie Dimon, No More Too Big To Fail', Washington Post (Nov.
    13, 2009) (online at www.washingtonpost.com/wp-dyn/content/article/
    2009/11/12/AR2009111209924.html).
        \633\ See, e.g., Joint Economic Committee, Written Testimony of
    Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City, Too
    Big to Fail or Too Big to Save? Examining the Systemic Threats of Large
    Financial Institutions, 111th Cong., at 23-24 (Apr. 21, 2009) (online
    at jec.senate.gov/
    index.cfm?FuseAction=Files.View&FileStore_id_5335d2cb-895a-4075-8db8-
    a8b71e27f933).
        \634\ Alan Greenspan, C. Peter McColough Series on International
    Economics: The Global Financial Crisis: Causes and Consequences,
    Council on Foreign Relations (Oct. 15, 2009) (online at www.cfr.org/
    publication/20417/
    c_peter_mccolough_series_on_international_economics.html) (hereinafter
    ``Greenspan on the Causes of the Crisis'').
        \635\ Id.
        \636\ David Moss, An Ounce of Prevention: The Power of Public Risk
    Management in Stabilizing the Financial System, Harvard Business School
    Working Paper No. 09-087 (Rev. Jan. 27, 2009) (online at www.hbs.edu/
    research/pdf/09-087.pdf) (hereinafter ``David Moss An Ounce of
    Prevention'').
    ---------------------------------------------------------------------------
        Others have suggested imposing limitations that prohibit
    banks getting to a specified size. For example, Simon Johnson,
    Professor of Global Economics and Management at the MIT Sloan
    School of Management, has suggested that capping assets under
    management at a single financial institution at $100 billion
    may permit such institutions to pass easily through the
    bankruptcy system, obviating the need for bailouts.\637\
    ---------------------------------------------------------------------------
        \637\ House Financial Services Committee, Written Testimony of
    Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT's
    Sloan School of Management, Systemic Risk: Are Some Institutions too
    Big to Fail, and if so, What Should We Do About It?, 111th Cong. (July
    21, 2009) (online at www.house.gov/apps/list/hearing/financialsvcs_dem/
    simon_johnson.pdf) (hereinafter ``Johnson Testimony on Systemic
    Risk'').
    ---------------------------------------------------------------------------
        Those in favor of retaining very large banks say there is a
    need within the global economy for large banks capable of
    lending billions of dollars at a time. Gerald Corrigan, a
    managing director of Goldman Sachs & Co., has remarked that it
    is the size of large financial institutions ``that allows
    [them] to meet the financing needs of large corporations--to
    say nothing of the financing needs of sovereign governments.''
    \638\ And while one commentator has noted that ``[t]he
    presumption . . . that big meant diversified and sophisticated
    and, therefore, less risky . . . proved false,'' nonetheless,
    ``the size of many of our financial institutions, despite its
    role in bringing on the crisis, has also greatly benefited the
    U.S. economy'' by ``enabl[ing] our big financial firms to
    compete against others in Europe and Asia'' and that ``[s]hould
    we fragment and constrain the system and cap the size of banks,
    it would undoubtedly limit the competitive level of service,
    breadth of products, and speed of execution,'' leading clients
    to ``turn to foreign banks that don't face the same
    restrictions.'' \639\
    ---------------------------------------------------------------------------
        \638\ E. Gerald Corrigan, Containing Too Big to Fail, Remarks at
    The Charles F. Dolan Lecture Series, Fairfield University (Nov. 10,
    2009) (online at www.fairfield.edu/documents/academic/
    dsb_corrigan_remarks_09.pdf).
        \639\ Mortimer Zuckerman, Finding the Right Fix for ``Too Big to
    Fail,'' Wall Street Journal (Nov. 25, 2009) (online at online.wsj.com/
    article/SB10001424052748704888404574550570805868530.html).
    ---------------------------------------------------------------------------
        Martin Baily and Robert Litan of the Brookings Institution
    have made the same argument, testifying before a Senate
    committee that ``[w]e need very large financial institutions
    given the scale of the global capital markets, and, of
    necessity, some of these may be `too big to fail' because of
    systemic risks. For U.S. institutions to operate in global
    capital markets, they will need to be large.'' \640\ Messrs.
    Baily and Litan further argued that punishing banks for
    becoming ``too'' successful will also have a negative impact on
    the willingness of financial institutions to compete with each
    other.\641\
    ---------------------------------------------------------------------------
        \640\ Senate Committee on Banking, Housing and Urban Affairs,
    Testimony of Martin Neil Baily and Robert E. Litan, Regulating and
    Resolving Institutions Considered ``Too Big to Fail,'' 111th Cong. (May
    6, 2009) (online at banking.senate.gov/public/index.cfm?FuseAction=
    Hearings.Hearing&Hearing_ID=7d66a948-69e4-407e-a895-04cec6a4f541)
    (hereinafter ``Bailey and Litan Testimony'').
        \641\ Bailey and Litan Testimony, supra note 640.
    ---------------------------------------------------------------------------
        Opponents of the view that the global market demands very
    large banks state that the need for a loan of $8 billion can be
    met by eight smaller banks each lending $1 billion. They
    further argue that these banks would compete against each other
    to provide the best loan terms, improving market efficiency
    over the current scenario in which a handful of banks provide
    all of the capital.\642\ Such an arrangement would also spread
    out the risk so that the majority of large transactions would
    not rest on a small number of very large banks.\643\ One
    commentator has argued that large corporations do not typically
    use one megabank to complete a significant transaction, but
    that up to 11 such large banks may be necessary.\644\ To the
    extent that a company operates in multiple countries, this
    commentator argues, the company is likely to select the best
    bank for its needs in each country or region, rather than
    relying on one-stop-shopping for its banking, countering the
    argument that multinational companies need multinational
    banks.\645\
    ---------------------------------------------------------------------------
        \642\ Cf. Johnson Testimony on Systemic Risk, supra note 637 (Dr.
    Johnson argues that ``breaking up our largest banks would likely
    increase (rather than reduce) the availability of low-cost financial
    intermediation services''). Ilan Moscovitz and Morgan Housel, It's Time
    to End ``Too Big To Fail,'' The Motley Fool (Nov. 13, 2009) (online at
    www.fool.com/investing/general/2009/11/13/its-time-to-end-too-big-to-
    fail.aspx) (hereinafter ``It's Time to End `Too Big To Fail' '').
        \643\ It's Time to End ``Too Big To Fail'', supra note 642.
        \644\ James Kwak, Who Needs Big Banks, The Baseline Scenario (Oct.
    12, 2009) (online at baselinescenario.com/2009/10/12/who-needs-big-
    banks/) (hereinafter ``Who Needs Big Banks'').
        \645\ Id.
    ---------------------------------------------------------------------------
                b. Limitations on Activities
        Some commentators have advocated for the reinstatement of
    the provisions of the Glass-Steagall Act, repealed in 1999,
    which precluded banks from acting as both investment banks and
    depository institutions. Notably, in May 2009, Congressman
    Maurice Hinchey (D-NY), with the support of fellow House
    members John Tierney (D-MA), Jay Inslee (D-WA), John Conyers
    (D-MI), and Peter DeFazio (D-OR), proposed an amendment that
    would reinstate those provisions. In announcing the amendment,
    Representative Hinchey stated that the repeal had created banks
    that provided ``one stop shopping'' with the result that
    ``these banks were empowered to make large bets with
    depositors' money and money they didn't really have. When many
    of those bets, particularly in the housing sector, didn't pan
    out, the whole deck of cards came crumbling down and U.S.
    taxpayers had to come to the rescue.'' \646\ Senators John
    McCain (R-AZ) and Maria Cantwell (D-WA) have recently
    introduced a bill in the Senate to prohibit certain
    affiliations between commercial and investment banks.\647\
    ---------------------------------------------------------------------------
        \646\ Office of Representative Maurice Hinchey, Hinchey to
    Introduce Amendment to Reinstate Glass-Steagall Act to Break Up
    MegaBanks that Caused Financial Crisis (Dec. 7, 2009) (online at
    www.house.gov/apps/list/press/ny22_hinchey/morenews/
    120709glassstegallamendment.html).
        \647\ Banking Integrity Act of 2009, S. 2886, 111th Cong. (2009).
    ---------------------------------------------------------------------------
        Paul Volcker, the former chairman of the Federal Reserve
    and current chairman of the President's Economic Recovery
    Advisory Board, has also recommended reinstating a barrier
    between commercial and investment banks that, while not a full
    return to Glass-Steagall as it previously existed, would be
    functionally similar to the barrier that existed under certain
    repealed sections of that act. Mr. Volcker has proposed
    breaking up the largest banks into investment houses and
    commercial banks, with government assistance available only to
    the commercial banks.\648\ The commercial banks would take
    deposits, make loans, and trade securities for their customers,
    but not for themselves. These banks would be eligible for
    government assistance if they were to falter. The investment
    banks, on the other hand, would be free to engage in riskier
    behavior because they would be buying and selling their own
    securities, but they would not be rescued if they were poised
    to fail. According to Mr. Volcker, regulation is insufficient
    without separating commercial banks from investment banks.
    ``The [commercial] banks,'' he has stated, ``are there to serve
    the public, and that is what they should concentrate on. These
    other activities create conflicts of interest. They create
    risks, and if you try to control the risks with supervision,
    that just creates friction and difficulties.'' \649\
    ---------------------------------------------------------------------------
        \648\ Charlie Rose, Paul Volcker: The Lion Lets Loose, BusinessWeek
    (Dec. 30, 2009) (online at www.businessweek.com/magazine/content/10_02/
    b4162011026995.htm) (interview of Mr. Volcker in which Mr. Volcker
    explained his vision of the type of reform needed); see also Louis
    Uchitelle, Volcker Fails to Sell a Bank Strategy, New York Times (Oct.
    21, 2009) (online at www.nytimes.com/2009/10/21/business/
    21volcker.html?_r=1) (hereinafter ``Volcker Fails to Sell a Bank
    Strategy'') (quoting statements by Mr. Volcker on the same subject).
        \649\ This position is not far from the ``break-up-the-banks''
    position advocated by Alan Greenspan. Greenspan, however, seems opposed
    to reinstating Glass-Steagall at this juncture. Volcker Fails to Sell a
    Bank Strategy, supra note 648. While similar in their desire to divide
    up the banks, the rationale behind the two positions is not fully
    aligned. The Greenspan position holds that the size of the banks
    themselves creates the risk, while Volcker's position holds that it is
    the inherent conflict within the banks that causes commercial banks to
    engage in risky behavior befitting investment banks. Other commentators
    suggest simply spinning off the banks' proprietary trading activities.
    See Roger Ehrenberg, Rethinking the Wall Street Business Model (Part 1)
    (Nov. 21, 2009) (online at www.informationarbitrage.com/2009/11/
    rethinking-the-wall-street-business-model.html).
    ---------------------------------------------------------------------------
        In response to these arguments, some commentators have
    stated that the repealed portions of Glass-Steagall have had
    little impact on the way traditional banks conduct their
    business, and that reinstating these portions would have
    implications in the international sphere while doing nothing to
    prevent another crisis.\650\ These commentators note that
    commercial banks have suffered because of their investment
    decisions with respect to mortgages, and other types of
    traditional lending--activities permitted under Glass-Steagall.
    The repeal of portions of Glass-Steagall permitted banks to
    engage in underwriting and dealing in securities, but these
    commentators note, those activities have not caused banks to
    fail. Instead, they argue, it was overinvestment in mortgage
    backed securities that led to the crisis, a phenomenon that
    would not have been prevented by Glass-Steagall.\651\ Former
    chairman of the law firm Sullivan & Cromwell H. Rodgin Cohen
    recently stated, ``If you look at what happened, with or
    without Glass-Steagall, it would have made no difference.''
    \652\ Mr. Cohen and others point out that both Bear Stearns and
    Lehman brothers were pure investment banks, and so would not
    have been affected by the Glass-Steagall prohibition on joint
    investment-commercial banks.\653\ Opponents of the Act's
    revival also argue that the Act was in place during the savings
    and loan crisis of the 1980s, yet did not prevent that
    crisis.\654\ Furthermore, according to economist Mark Zandi,
    reinstating those portions of Glass-Steagall and ``breaking up
    the banking system's mammoth institutions would be too
    wrenching and would put U.S. institutions at a distinct
    competitive disadvantage vis-a-vis their large global
    competitors'' who do not have such restrictions.\655\
    ---------------------------------------------------------------------------
        \650\ See, e.g., Peter Wallison, Did the ``Repeal'' of Glass-
    Steagall Have Any Role in the Financial Crisis? Not Guilty. Not Even
    Close, Networks Financial Institute (Nov. 2009) (online at
    papers.ssrn.com/sol3/papers.cfm?abstract_id=1507803) (hereinafter
    ``Wallison Paper on Glass-Steagall''); Robert Pozen, Stop Pining for
    Glass-Steagall, Forbes.com (Oct. 5, 2009) (online at www.forbes.com/
    forbes/2009/1005/opinions-glass-steagall-on-my-mind.html).
        \651\ See, e.g., Wallison Paper on Glass-Steagall, supra note 650.
        \652\ Alison Vekshin & James Sterngold, Reviving Glass-Steagall
    Means ``War'' on Wall Street, BusinessWeek (Dec. 27, 2009) (online at
    www.businessweek.com/investor/content/dec2009/pi20091228_523550.htm)
    (hereinafter `` `War' on Wall Street'').
        \653\ ``War'' on Wall Street, supra note 652.
        \654\ Would Reinstatement of Glass-Steagall Improve Banking?,
    American Banking News (Jan. 4, 2010) (online at
    www.americanbankingnews.com/2010/01/04/would-reinstatement-of-glass-
    steagall-improve-banking/).
        \655\ House Financial Services Committee, Written Testimony of Mark
    Zandi, chief economist and co-founder of Moody's Economy.com, Systemic
    Risk: Are Some Institutions too Big to Fail, and if so, What Should We
    Do About It?, 111th Cong. (July 21, 2009) (online at www.house.gov/
    apps/list/hearing/financialsvcs_dem/zandi.pdf).
    ---------------------------------------------------------------------------
                c. Increased Regulatory Oversight
        Another school of thought holds that large institutions
    that pose a systemic risk will and must exist, and that the
    best solution is to increase regulation of these institutions
    proportionately to the risk that they pose.\656\ Certain
    legislative proposals put forward in the House and Senate, and
    by the current Administration, hew closely to this line. Under
    key provisions of these proposals, systemic risk would be
    managed through either new or newly empowered government
    entities and increased supervision and regulation of financial
    institutions.\657\ These proposals are discussed in detail in
    Section G.4 below.
    ---------------------------------------------------------------------------
        \656\ See, e.g., Paul Krugman, Too Big to Fail FAIL, The New York
    Times (June 18, 2009) (online at krugman.blogs.nytimes.com/2009/06/18/
    too-big-to-fail-fail) (noting that systemic risk is not a new concept
    and was a concern at least as of the Latin debt crisis in 1982. The
    solution, he states, is to ``[r]egulate and supervise, then rescue if
    necessary; there's no way to make this [financial system] automatic'').
        \657\ U.S. Department of the Treasury, Financial Regulatory Reform:
    A New Foundation, at 10-19 (June 17, 2009) (online at
    www.financialstability.gov/docs/regs/FinalReport_web.pdf).
    ---------------------------------------------------------------------------
        Some have argued that increased regulation would only
    exacerbate the current problem of implicit guarantees by
    highlighting the firms that require additional oversight, thus
    marking them as too big to fail. Kevin Hassett of the American
    Enterprise Institute has remarked that ``[o]nce there is a
    public list of firms that are too big to fail, they will have
    an enormous competitive advantage . . . [s]ince government is
    backstopping them, they will be able to borrow at lower
    interest rates[.]'' \658\ SEC Commissioner Elisse Walter has
    similarly testified that under proposed legislation creating a
    council to monitor financial risk, ``a real risk remains that
    market participants will favor large interconnected firms,
    particularly those identified as systemically important, over
    smaller firms of equivalent creditworthiness, because of the
    belief that the government will step in and support such an
    institution, its bondholders, or counterparties in times of
    crisis.'' \659\ Others have observed that if interconnectedness
    results in systemic risk that must be regulated, there is no
    reason to stop at financial institutions; any large,
    interconnected business must be similarly regulated--or there
    is no need for such regulation because interconnectedness is
    not inherently risky.\660\ There is the additional difficulty
    of identifying potentially risky behavior in time to avert a
    financial crisis. In light of the failure of many to predict
    the current crisis, the question arises of what level of
    competence is required for an economist to predict accurately
    which institutions will pose a threat to our financial
    system.\661\
    ---------------------------------------------------------------------------
        \658\ Kevin Hassett, Obama's Too-Big-to-Fail Plan Is Too Dumb to
    Pass, American Enterprise Institute for Public Policy Research (Sept.
    28, 2009) (online at www.aei.org/article/101075).
        \659\ House Committee on Agriculture, Written Testimony of
    Securities and Exchange Commissioner Elisse Walter, Review of Financial
    Stability Improvement Act, 111th Cong. (Nov. 17, 2009) (online at
    agriculture.house.gov/testimony/111/h111709/Walter.pdf).
        \660\ See Hal Scott, Do We Really Need a Systemic Regulator?, Wall
    Street Journal (Dec. 10, 2009) (online at online.wsj.com/article/
    SB10001424052748704342404574577870952276300.html).
        \661\ One method of valuing risk that has been proposed in the past
    is to track the spread between the yield on a Treasury bond and on an
    institution's own subordinated debt with a similar maturity date. The
    rationale is that the spread should reflect the increased yield to
    balance the increased risk presented by the institution. This notion
    has been challenged, however, by data analysis that shows a lack of
    correlation between risk and yield spreads. C.N.V. Krishnan et al.,
    Monitoring and Controlling Bank Risk: Does Risky Debt Help?, The
    Journal of Finance (Feb. 2005); Diana Hancock and Myron L. Kwast, Using
    Subordinated Debt to Monitor Bank Holding Companies: Is It Feasible?,
    The Federal Reserve Board of Governors (Apr. 27, 2001) (online at
    www.federalreserve.gov/Pubs/FEDS/2001/200122/200122pap.pdf).
    ---------------------------------------------------------------------------
                d. Charging Too Big To Fail Institutions Insurance Fees or
                        Taxes
        Banks that are considered too big to fail receive the
    benefit of an implicit taxpayer subsidy, since their cost of
    funding does not adequately reflect the potential costs of
    their rescue. Some of the reform proposals suggest that
    institutions that are found to pose systemic risks be assessed
    financial contributions for the risk they pose, either before
    or after any failure occurs. A proposal introduced by House
    Financial Services Committee Chairman Barney Frank would create
    an insurance fund within the FDIC similar to that available to
    insure bank deposits to be used to ``extend credit to or
    guarantee obligations of solvent insured depository
    institutions or other solvent companies that are predominantly
    engaged in activities that are financial in nature, if
    necessary to prevent financial instability during times of
    severe economic distress[.]'' \662\ This insurance would be
    funded by assessments on ``large financial companies'' under
    terms in the Administration's proposed regulatory reform
    legislation that would enable the FDIC to impose ``risk-based
    assessments on bank holding companies based on their total
    liabilities.'' \663\
    ---------------------------------------------------------------------------
        \662\ Financial Stability Improvement Act of 2009, H.R. 3996,
    Sec. 1109(a) (2009).
        \663\ Resolution Authority for Large, Interconnected Financial
    Companies Act of 2009, 1209(o)(1) (2009). The House bill actually
    states that the assessments are to be made under 1609(o) of the
    Administration's proposal. No such section of that proposal exists
    while 1209(o) appears to include the provision to which the House bill
    intended to refer.
    ---------------------------------------------------------------------------
        At least one commentator has noted a flaw in this proposal.
    According to economist Dean Baker, because the fee is to be
    assessed only after a bank faces failure, either the necessary
    funds are unlikely to be available, or other banks are unlikely
    to be willing to make such payments.\664\ Whether the former or
    the latter scenario applies, he writes, depends on whether the
    failing bank has gotten into trouble by doing what everyone
    else was doing--in which case all the other banks would be in
    just as much trouble and unable to pay--or it was doing some
    unusual, risky thing--in which case all the other banks would
    be unwilling to underwrite the failing bank's imprudence. David
    Moss of the Harvard Business School has proposed, among other
    options, a system of federal capital insurance under which
    systemically significant institutions would be publicly
    identified and then required to pay into a federal insurance
    fund on a regular basis.\665\ Premiums, as for any insurance
    plan, would be keyed to the level of risk the insured posed,
    and payments on claims would be limited to a pre-set
    amount.\666\ Mr. Moss also believes that in the event of a
    failure, the federal government should not bail out or prop up
    the failing company, but should take the company over and
    restructure, sell, or liquidate it.\667\ Such measures, he
    believes, would result in a system where no institution is too
    big to fail.
    ---------------------------------------------------------------------------
        \664\ Dean Baker, Breaking Up the Banks is Hard to Do, The Guardian
    (Nov. 2, 2009) (online at www.guardian.co.uk/commentisfree/cifamerica/
    2009/nov/02/banking-regulation-us-congress/print).
        \665\ David Moss An Ounce of Prevention, supra note 636.
        \666\ David Moss An Ounce of Prevention, supra note 636.
        \667\ David Moss An Ounce of Prevention, supra note 636.
    ---------------------------------------------------------------------------
        Another option may be a so-called Tobin tax, named after
    the late economist James Tobin, which would impose a tax on
    cross-currency financial transactions. While a Tobin tax has
    been most often proposed as a means of funding projects for the
    public good, today's proponents envisage it as an emergency
    fund to be used to support a faltering financial system. The
    most prominent proponent of the tax has been British Prime
    Minister Gordon Brown, who reportedly raised the issue of
    creating such a tax during the November 2009 meeting of the
    finance ministers of the G-20.\668\ Secretary Geithner
    reportedly rejected the idea during the same meeting.\669\
    Opponents of the tax argue that the presence of such an
    emergency fund may perpetuate moral hazard as institutions
    begin to rely on the presence of the fund to backstop major
    losses.\670\
    ---------------------------------------------------------------------------
        \668\ Gordon Brown's Global Tax Trap, Wall Street Journal (Nov. 13,
    2009) (online at
    online.wsj.com/article/
    SB10001424052748704576204574531211500981726.html#printMode)
    (hereinafter ``Gordon Brown's Global Tax Trap'').
        \669\ Gordon Brown's Global Tax Trap, supra note 668.
        \670\ Gordon Brown's Global Tax Trap, supra note 668.
    ---------------------------------------------------------------------------
                e. Other Regulatory Options
        Messrs. Baily and Litan, whose views on the need for large
    banks are discussed above, argue that while the government
    should not break up large banks, it should take steps to ensure
    that any large-scale growth is ``organic,'' based on the banks'
    own success, and not the result of a merger. To this end, they
    argue, the government should review proposed mergers to prevent
    those that would create an institution that might pose a
    systemic risk.\671\
    ---------------------------------------------------------------------------
        \671\ Bailey and Litan Testimony, supra note 640.
    ---------------------------------------------------------------------------

    2. Liquidation and Reorganization

        The impact of implicit guarantees can also be substantially
    reduced if there are credible ways to liquidate or reorganize
    failing businesses. In effect, if there are ways to permit such
    businesses to fail, then they are no longer too big to fail.
    Several options are under discussion.
                a. ``Living Wills''
        There are many advocates of ``living wills,'' contingency
    plans creating a systematic regime under which an institution
    that posed a systemic risk would be wound down, which also
    entails the institution reorganizing itself so that the plan
    can be effected in a crisis.\672\ Advocates argue that the
    existence of such plans would avoid the shockwaves that the
    disorderly collapse of Lehman Brothers caused and AIG
    threatened, but it is possible that the very act of creating
    such plans might bring unexpected risks to the attention of
    management in time for them to be addressed.\673\ Living wills
    could be used in conjunction with several of the other
    regulatory approaches being considered.
    ---------------------------------------------------------------------------
        \672\ Among the proponents for such contingency plans are members
    of the House and Senate and the President, who have included variations
    on this idea in their financial reform bills. See Section G.4, infra.
        \673\ One related proposal would have banks issue contingent
    convertible bonds, long-term debt that would be convertible to equity
    upon a triggering event, providing the bank with access to capital. A
    ``living will'' would be required in the event the new equity was
    insufficient to meet the bank's needs. See, e.g., the description in
    Section G.4(c) below of the bill that has been proposed in the Senate,
    which incorporates this proposal.
    ---------------------------------------------------------------------------
        However, even commentators generally in favor of this
    concept note that living wills are an incomplete tool without
    ensuring separation among an institution's component parts.
    This separation can take place along activity lines, where
    systemically critical functions must have ring-fencing capable
    of protecting them during the unwinding pursuant to the living
    will.\674\ The international complexities of large,
    interconnected firms also may require that ring-fencing or
    other separation by national operating units accompany living
    wills.\675\ The absence of ring-fencing controls, along either
    functional or national lines, means that an institution might
    collapse more tidily but not necessarily that the government
    will permit it to do so; until the government does, the moral
    hazard remains.\676\
    ---------------------------------------------------------------------------
        \674\ Senate Committee on Banking, Housing, and Urban Affairs,
    Written Testimony of Vincent Reinhart, Resident Scholar, American
    Enterprise Institute, Establishing a Framework for Systemic Risk
    Regulation, 111th Cong., at 9-10 (July 23, 2009) (online at
    banking.senate.gov/public/
    index.cfm?FuseAction=Files.View&FileStore_id=c00a4670-8edd-4a6e-947f-
    09afb555fa4d).
        \675\ David G. Mayes, Banking Crisis Resolution Policy--Different
    Country Experiences, Norges Bank Staff Memo, at 58-61 (2009) (online at
    www.norges-bank.no/upload/77285/staff_memo_09_10.pdf).
        \676\ See, e.g., Death Warmed Up, The Economist (Oct. 1, 2009)
    (online at www.economist.com/businessfinance/
    displaystory.cfm?story_id=14558456).
    ---------------------------------------------------------------------------
                b. Resolution Authority
        The problem with very large institutions, according to
    some, is not that they are too big to fail, but that the proper
    structures do not exist to enable their orderly failure.\677\
    The Administration has also proposed legislation granting the
    government resolution authority for systemically significant
    institutions that fall outside of the FDIC's existing
    resolution regime for commercial banks. Under the proposed
    legislation, resolution authority would be available to the
    Secretary of the Treasury upon determination, with positive
    recommendations from the Federal Reserve and the appropriate
    federal regulators, and in consultation with the President,
    that ``the financial institution in question is in danger of
    becoming insolvent . . . its insolvency would have serious
    adverse effects on economic conditions or financial stability
    in the United States; and . . . taking emergency action . . .
    would avoid or mitigate these adverse effects.'' \678\ A
    similar proposal has been drafted by the House.
    ---------------------------------------------------------------------------
        \677\ According to Professor Charles Calomiris of the Columbia
    Business School, bankruptcy law as it currently exists does not
    contemplate allowing ``large, complex financial institutions to enter
    bankruptcy, or receivership in the case of banks, because there is no
    orderly means for transferring control of assets and operations,
    including the completion of complex transactions with many
    counterparties perhaps in scores of countries via thousands of
    affiliates.'' Charles Calomiris, In the World of Banks, Bigger Can be
    Better, Wall Street Journal (Oct. 19, 2009) (online at online.wsj.com/
    article/SB10001424052748704500604574483222678425130.html). The
    solution, Mr. Calomiris believes, lies in constructing a system that
    would enable such a bankruptcy. As discussed below, various legislative
    proposals include provisions to address just this concern.
        \678\ U.S. Department of the Treasury, Treasury Proposes
    Legislation for Resolution Authority (Mar. 25, 2009) (online at
    www.financialstability.gov/latest/tg70.html).
    ---------------------------------------------------------------------------
        In the Senate, Senators Bob Corker (R-TN) and Mark Warner
    (D-VA) have introduced legislation that would vest resolution
    authority in the FDIC. This authority would extend only to
    depository institutions and their holding companies,
    affiliates, and subsidiaries and would be available only when
    the FDIC determined that a receivership was preferable to a
    resolution under Chapter 11 bankruptcy.\679\ Other Republican
    lawmakers, rejecting the view that the federal government
    should determine which institutions should receive government
    intervention in the event of failure, have instead proposed
    improving the bankruptcy system to enable it to process huge,
    complex bankruptcies such as AIG's might have been.\680\ A bill
    proposed in the House would amend the current bankruptcy code
    to enable the orderly liquidation or reorganization of non-bank
    financial institutions as a means of forestalling the need for
    future bail-outs.\681\ These bills are discussed in greater
    detail below.
    ---------------------------------------------------------------------------
        \679\ Resolution Reform Act of 2009, S. 1540, 111th Congress
    (2009).
        \680\ The current bankruptcy system has been criticized as being
    ill-equipped to handle a bankruptcy such as AIG's. Professor Stephen
    Lubben of Seton Hall Law School, for example, has noted that the 2005
    expansion of sections of the Bankruptcy Code that provide a ``safe
    harbor'' for the type of swap agreements at issue in AIG's decline have
    exacerbated this problem. Stephen Lubben, Repeal the Safe Harbors,
    Seton Hall Public Law Research Paper No. 1497040(Nov. 1, 2009). One of
    the key functions of bankruptcy law is to freeze the debtor estate,
    prohibiting any payments out of the debtor's assets, until the entire
    estate and all claims on it have been sorted out and preferences
    established. The safe harbor provisions exempt certain types of
    agreements from this freeze and permit payment. Because the swap
    agreements fit into the safe harbor provision, AIG's trouble triggered
    what Professor Lubben describes as a ``run'' on the institution as CDS
    counterparties insisted on payment. Professor Lubben has therefore
    called for a repeal of the safe harbor provision as a way to prevent a
    future situation like AIG's. In contrast, Professor Edward R. Morrison
    of Columbia Law School has argued that the Bankruptcy Code is
    inadequate to protect the economy from failing systemically significant
    institutions, and a systemic risk regulator with the power to monitor
    and rescue institutions should be created. Edward R. Morrison, Is the
    Bankruptcy Code an Adequate Mechanism for Resolving the Distress of
    Systemically Important Institutions?, Temple Law Review (forthcoming)
    (available online at papers.ssrn.com/sol3/
    papers.cfm?abstract_id=1529802).
        \681\ Consumer Protection and Regulatory Enhancement Act, H.R.
    3310, 111th Congress (2009).
    ---------------------------------------------------------------------------
                c. Chapter 11
        Some commentators have argued that Chapter 11 bankruptcy
    principles should play a role in the extension of taxpayer
    money to ``bail out'' private businesses. Of these
    commentators, some propose the increased use of prepackaged
    bankruptcy filings (commonly referred to as ``pre-packs'')
    before the government provides assistance,\682\ some favor
    ordinary bankruptcy filings in which the debtor's operations
    come under court supervision and shareholders are wiped
    out,\683\ and others propose implementing Chapter 11-like
    measures without the business actually filing a petition with
    the bankruptcy court.\684\ Any of these measures may help to
    unwind implicit government guarantees by holding businesses and
    investors accountable for their actions.
    ---------------------------------------------------------------------------
        \682\ See, e.g., Edward I. Altman and Thomas Philippon, Where
    Should the Bailout Stop?, in Restoring Financial Stability, at 355-61
    (Viral V. Acharya and Matthew Richardson, eds., 2009).
        \683\ See, e.g., Jennifer Chamberlain, The Big Three: Bailout or
    Bankruptcy?, Illinois Business Law Journal (Mar. 7, 2009) (online at
    www.law.uiuc.edu/bljournal/post/2009/03/07/The-Big-Three-Bailout-or-
    Bankruptcy.aspx); Paul Ingrassia, The Case for Chapter 11, Portfolio
    (Nov. 9, 2008) (online at www.portfolio.com/news-markets/national-news/
    portfolio/2008/11/09/Can-
    Bankruptcy-Save-US-Carmakers/).
        \684\ See, e.g., Global Economic Symposium, The Global Polity: The
    Future of Global Financial Governance, at 4 (Sept. 2009) (online at
    www.global-economic-symposium.org/ges-2008-09/ges-2009/downloads/
    session-handouts/the-global-polity/the-future-of-global-financial-
    governance
    _2009).
    ---------------------------------------------------------------------------
        In a Chapter 11 reorganization, a troubled company
    restructures its business to emerge as viable and
    profitable.\685\ To this end, under certain circumstances the
    business may wipe out existing shareholder classes, renegotiate
    the terms or balances on its debt, exchange preexisting debt
    for equity in the new business, replace management, and undo
    fraudulent transfers or preferences.\686\ Often those who
    provide financing to the debtor are given liens at a higher
    priority than existing creditors and shareholders.\687\
    ---------------------------------------------------------------------------
        \685\ See generally COP September Oversight Report, supra note 108,
    at 40 (providing an in depth discussion of business restructuring under
    bankruptcy law).
        \686\ A ``fraudulent transfer'' is a transfer for less-than-
    reasonably equivalent value made while insolvent. A ``preference'' is
    an unusual payment to one creditor that prevents other creditors from
    receiving a pro rata share of the assets. Professor Randy Picker,
    Bailouts and Phantom Bankruptcies, The University of Chicago Law School
    Faculty Blog (Sept. 23, 2008) (online at uchicagolaw.typepad.com/
    faculty/2008/09/bailouts-and-ph.html) (hereinafter ``Bailouts and
    Phantom Bankruptcies'').
        Under these avoiding powers, creditors may be able to force
    outgoing executives to repay their bonuses, thereby returning capital
    to the business. See Jesse Fried, Uncle Sam Should Claw Back Wall
    Street Bonuses, Harvard Law School Forum on Corporate Governance and
    Financial Regulation (Oct. 4, 2008) (online at blogs.law.harvard.edu/
    corpgov/2008/10/04/uncle-sam-should-claw-back-wall-street-bonuses)
    (hereinafter ``Uncle Sam Should Claw Back Wall Street Bonuses'').
        \687\ See COP September Oversight Report supra note 108, at 40-48
    (discussing priority of claims and general principles of bankruptcy
    law).
    ---------------------------------------------------------------------------
        Congress amended the Bankruptcy Code in 2005 to exempt a
    broad range of financial assets from bankruptcy rules.\688\
    Swaps, repurchase agreements, securities contracts, and other
    financial products were exempted from the automatic stay that
    normally prevents creditors from seizing a debtor's assets
    after the filing of a bankruptcy petition. Companies holding
    substantial financial assets may therefore find bankruptcy a
    less attractive way to resolve financial distress, since
    creditors could continue to collect on some contracts. Critics
    of the exemptions have argued that they hinder the bankruptcy
    system's ability to distribute property in an orderly and
    equitable manner.\689\ Under the current rules, some creditors
    may collect on their debts while others are stayed. This
    creates an incentive for parties seeking to bypass the
    bankruptcy process to structure contracts as swaps, securities
    contracts, or other exempt categories of assets.
    ---------------------------------------------------------------------------
        \688\ See 11 U.S.C. Sec. Sec. 555-56, 559-61.
        \689\ See, e.g., House Judiciary Committee, Subcommittee on
    Commercial and Administrative Law, Written Testimony of Professor Jay
    Lawrence Westbrook, Exemption of Financial Assets from Bankruptcy
    (Sept. 26, 2008) (online at www.judiciary.house.gov/hearings/pdf/
    Westbrook080926.pdf).
    ---------------------------------------------------------------------------
        If Congress required a bankruptcy filing as a prerequisite
    to receiving assistance, the petition could be a regular
    bankruptcy or a pre-pack. Pre-packs are Chapter 11 bankruptcies
    where the plans of reorganization are prepared in advance of
    filing petitions with the bankruptcy court. Pre-packs are
    formulated after negotiations and with the cooperation of
    creditors and other invested parties. Most of the legal issues
    litigated in the bankruptcy process are resolved as part of
    this out-of-court negotiation. This reduces the time and cost
    spent in the actual bankruptcy process. The sooner the
    restructuring under Chapter 11 is completed, the sooner the
    company can return focus to its core operations.\690\
    ---------------------------------------------------------------------------
        \690\ Some of these pre-pack reorganizations are extremely large,
    but can nevertheless be accomplished in less than two months. See COP
    September Oversight Report, supra note 108, at 40 (discussing pre-packs
    under Chapter 11).
    ---------------------------------------------------------------------------
        Commentators who propose pre-packs as a solution to
    reorganize large businesses hope to take advantage of the
    debtor's rights under Chapter 11 at this reduced cost to the
    business. They propose that the government should make the
    extension of ``bailout'' funds contingent upon the distressed
    business filing a pre-pack with the bankruptcy court.\691\ In
    doing so, shareholders could be wiped out, creditors could take
    a haircut, misappropriated funds could be returned to the
    business, and incompetent management could be replaced. These
    repercussions would add to a business's incentive to steer
    itself away from the brink of disaster, and would incentivize
    commercial creditors to pressure businesses to take fewer
    risks. The same incentives could be created by mandating a
    regular bankruptcy filing, and there is disagreement regarding
    the cost savings associated with pre-packs.\692\ In either
    case, it could be argued that the bankruptcy requirement may
    counterbalance any market distortion that arises from implicit
    guarantees, while allowing the government to intervene to save
    systemically important institutions. Other commentators argue
    the same result is possible without actually utilizing the
    bankruptcy court.\693\ Instead of filing a pre-pack, the
    government could make any taxpayer bailout contingent upon
    successful out-of-court negotiations between the distressed
    business and the invested parties. Thus, if the business wants
    public funding, it must wipe out its shareholders, get its
    creditors to agree to take a haircut, and replace its
    management. This would have the same effect as filing a pre-
    pack--i.e., holding managers and investors accountable for
    their actions and incentivizing prudent decision making.
    Moreover, this approach would also serve to wind down the
    government's implicit guarantee.
    ---------------------------------------------------------------------------
        \691\ Jim Kuhnhenn, Bailout With a Price: Chapter 11 Bankruptcy,
    Associated Press (Nov. 20, 2008) (online at seattletimes.nwsource.com/
    html/businesstechnology/2008412177_apmeltdownbankruptcy.html).
        \692\ Pre-packs may prove infeasible in the case of systemic
    failures, in which case regular filings may be the only form of
    bankruptcy relief available to debtors.
        \693\ See, e.g., Bailouts and Phantom Bankruptcies, supra note 108;
    Uncle Sam Should Claw Back Wall Street Bonuses, supra note 686; Robert
    Reich, The Real Difference Between Bankruptcy and Bailout, Robert
    Reich's Blog (Nov. 11, 2008) (online at robertreich.blogspot.com/2008/
    11/real-difference-between-bankruptcy-and.html).
    ---------------------------------------------------------------------------

    3. International Aspects of Reform

        Federal Reserve Board Governor Daniel Tarullo recently
    remarked on the need for a resolution plan to contemplate the
    specific issues confronting a failing international
    institution. ``Some of those [insolvency] regimes may be
    substantively inconsistent with one another, or may not account
    for the special characteristics of a large international
    firm,'' he noted.\694\ He further remarked that ``an effective
    international regime would . . . likely require agreement on
    how to share the losses and possible special assistance
    associated with a global firm's insolvencies.'' Such
    ``satisfyingly clean and comprehensive solutions to the
    international difficulties occasioned by such insolvency,'' he
    believes, however, ``are not within sight.'' Professor Simon
    Johnson of the MIT Sloan School of Management has expressed
    similar concerns. Writing about last summer's G-8 summit, he
    noted the lack of progress on ``any kind of international
    agreement that would be the essential complement to a national
    legal authority (for example, in the United States or Europe),
    by providing a framework for `resolving' the failure of a major
    financial institution with cross-border assets and
    liabilities[.]'' \695\ The tension between the need for such an
    international regulatory scheme and the difficulty of creating
    one, even just for the European markets, was outlined by the
    deputy director of the Monetary and Capital Markets Department
    of the International Monetary Fund, Jan Brockmeijer, in his
    remarks at a conference in Belgium this summer: ``on the one
    hand, cross-border integration of European financial markets is
    desirable,'' he stated. ``But . . . at the same time, financial
    supervision remains fundamentally a national responsibility.''
    \696\
    ---------------------------------------------------------------------------
        \694\ Federal Reserve Board of Governors, Speech by Daniel Tarullo,
    Supervising and Resolving Large Financial Institutions (Nov. 10, 2009)
    (online at www.federalreserve.gov/newsevents/speech/
    tarullo20091110a.htm).
        \695\ Simon Johnson, What the G-8 Won't Achieve, The New York Times
    (July 9, 2009) (online at economix.blogs.nytimes.com/2009/07/09/what-
    the-g-8-wont-achieve/).
        \696\ Jan Brockmeijer, Lessons of the Crisis for EU Financial
    Supervisory Policy, Remarks at the IMF-Bruegel-National Bank of Belgium
    Conference After the Storm: The Future Face of Europe's Financial
    System (Mar. 24, 2009) (online at www.imf.org/external/np/seminars/eng/
    2009/eurfin/pdf/brockm.pdf).
    ---------------------------------------------------------------------------
        The Basel Committee's more modest approach suggests ring-
    fencing during periods of considerable financial distress. Such
    an approach would enable host countries to shore up
    institutions operating within their domestic borders. To do so,
    changes to existing laws would need to allow for this
    particular framework to complement domestic regulatory aims.
    The approach would protect the pertinent functions of the
    failing institution, but not the institution itself. As a
    result, such efforts would limit financial contagion and lessen
    the likelihood of moral hazard.\697\
    ---------------------------------------------------------------------------
        \697\ Basel Committee on Banking Supervision, Report and
    Recommendations of the Cross-border Bank Resolution Group (Sept. 2009)
    (online at www.bis.org/publ/bcbs162.pdf) (hereinafter ``Basel Committee
    Report'').
    ---------------------------------------------------------------------------

    4. Proposed Legislation

        Legislative proposals from the Administration and both
    houses of Congress have drawn from many of the proposals
    discussed above.
                a. Administration's Proposal
        Under a legislative proposal put forward by the current
    Administration, new government entities would provide
    ``robust'' supervision of the financial services sector. The
    proposed government entities include a Financial Services
    Oversight Council, a Consumer Financial Protection Agency, and
    a National Bank Supervisor. The Council would ``identify
    emerging risks'' and ``advise the Federal Reserve on the
    identification of firms whose failure could pose a threat to
    financial stability due to their combination of size, leverage,
    and interconnectedness.'' \698\ The Consumer Financial
    Protection Agency would ``protect consumers of credit, savings,
    payment, and other consumer financial products and services,
    and to regulate providers of such products and services,'' in
    part to minimize aggregation of risk.\699\ The National Bank
    Supervisor would ``conduct prudential supervision and
    regulation of all federally chartered depository institutions,
    and all federal branches and agencies of foreign banks.'' \700\
    The proposal also includes the creation of various offices
    within Treasury to improve oversight of systemically
    significant institutions.
    ---------------------------------------------------------------------------
        \698\ U.S. Department of the Treasury, Financial Regulatory Reform:
    A New Foundation, Summary of Recommendations (online at
    www.financialstability.gov/docs/regs/FinalReport_web.pdf) (accessed
    Jan. 13, 2010).
        \699\ Id.
        \700\ Id.
    ---------------------------------------------------------------------------
        The Administration's proposal also contemplates increased
    oversight of institutions that may pose a systemic risk, dubbed
    ``Tier 1 financial holding companies,'' and a greater concern
    for how individual firms may impact the overall economy. Tier 1
    FHCs would be subject to stricter and more conservative
    regulations regarding capital levels and liquidity
    requirements,\701\ and might be subject to standards and
    guidelines for executive compensation that aim to align
    employees' interests with those of long-term shareholders and
    prevent incentives for excessive risk-taking. These firms would
    also be regulated with a macroeconomic view, taking into
    consideration the effects that actions by the company might
    impose on the wider economy. Finally, a Tier 1 FHC would be
    required to implement a plan for an orderly winding down if the
    firm were to face insolvency.
    ---------------------------------------------------------------------------
        \701\ Contingent capital bonds (commonly referred to as ``CoCo
    bonds'' or ``CoCos'') would be one method a Tier 1 FHC could use to
    meet these more stringent requirements. CoCo bonds refer to debt that
    may be converted to common equity when the issuer is under distress.
    This conversion occurs automatically upon triggering one or more
    contingencies (e.g., Tier 1 capital level falls below specific
    threshold, market price contingency, etc.). As a result, the issuer is
    instantly given a capital boost and is saved from having to raise fresh
    capital at high interest rates.
    ---------------------------------------------------------------------------
                b. House Legislation
        The Wall Street Reform and Consumer Protection Act passed
    the House of Representatives on December 11, 2009, by a vote of
    223-202.\702\ The bill, which was introduced on December 2 by
    Financial Services Committee Chairman Barney Frank (D-MA),
    incorporates provisions from nine separate bills reported by
    the Financial Services, Energy and Commerce, and Agriculture
    committees. The bill, H.R. 4173, would create an inter-agency
    oversight council charged with identifying large, complex
    financial companies that pose a systemic risk to financial
    stability and economic growth. These firms would be subject to
    heightened oversight, prudential regulation, and reporting and
    disclosure requirements. The bill would also establish an
    orderly process for resolving large, failing financial firms
    whose problems could not be addressed by a stricter regulatory
    regime or the bankruptcy process.
    ---------------------------------------------------------------------------
        \702\ CQ House Actions Reports, No. 111-22 (Dec. 7, 2009)
    (describing the bill); CQ House Actions Reports, No. 111-20 (Dec. 14,
    2009) (describing the vote).
    ---------------------------------------------------------------------------
        H.R. 4173 would establish a council of federal regulators,
    the Financial Services Oversight Council (``the Council''), to
    monitor the financial system and regulate any financial company
    whose material financial distress could pose a threat to
    financial stability or whose scope, size, scale, concentration,
    interconnectedness, or mix of activities could pose a threat to
    economic stability.\703\ After consultation with a financial
    company's regulator and upon a majority vote of the Council
    members, the Council would be empowered to place stricter
    regulatory standards on such company. This designation would
    subject a company that was not already subject to the Bank
    Holding Company Act of 1956 (Pub. L. 84-511), to certain
    provisions of the Act, which the Federal Reserve is responsible
    for enforcing, as if the company were a financial holding
    company. The Federal Reserve, as agent for the Council and in
    coordination with appropriate supervisors, would be responsible
    for implementing and enforcing heightened prudential standards.
    The heightened standards imposed by the Federal Reserve would
    have to include:
    ---------------------------------------------------------------------------
        \703\ Voting members of the council would include the secretary of
    the Treasury; the chair of the Federal Reserve; Comptroller of the
    Currency; chair of the Securities and Exchange Commission; chair of the
    Commodity Futures Trading Commission; director of the Federal Housing
    Financing Agency; chair of the National Credit Union Administration;
    and an appointed state insurance commission and state-banking
    supervisor would serve on the council for up to two years in a non-
    voting capacity.
    ---------------------------------------------------------------------------
               Risk-based and size-based capital
            requirements;\704\
    ---------------------------------------------------------------------------
        \704\ When calculating new capital requirements, the Federal
    Reserve would have to take into account the company's off-balance sheet
    exposure, including financial derivatives obligations. Companies
    subject to stricter prudential standards would be limited to a debt-to-
    equity ratio of 15 to 1.
    ---------------------------------------------------------------------------
               Leverage limits;
               Liquidity requirements;
               Concentration requirements;
               Prompt corrective action requirements;
               Resolution plan requirements; and
               Risk management requirements.
        In addition to restrictions stipulated by the bill, the
    Federal Reserve, as agent for the Council, also would have
    authority to prohibit a firm from engaging in any credit
    transaction or disbursal of capital it deemed a detriment to
    financial stability. Senior management of undercapitalized
    institutions would be subject to dismissal, and the Federal
    Reserve could require the submission of quarterly stress tests
    from troubled companies. All financial companies subject to
    stricter regulatory standards would be required to submit to
    the Federal Reserve and FDIC plans for an orderly and rapid
    dissolution in the event of a severe financial crisis.
        If, after the company were subjected to stricter regulatory
    standards, it continued to pose a grave threat to financial
    stability of the economy, the Council could take several
    additional steps to limit the danger posed by the company. The
    Council could modify the existing prudential standards, impose
    conditions on certain activities, limit mergers and
    acquisitions, and restrict the company's ability to offer
    certain financial products. As a last resort, the Council, with
    concurrence by the Secretary of the Treasury or the President,
    could require a company to sell, divest, or otherwise transfer
    business units, branches, assets, or off-balance sheet items to
    unaffiliated companies.
        H.R. 4173 would also grant to the FDIC the authority to
    dissolve systemically important financial firms that are in
    default or in danger of default. The new mechanism would
    empower the FDIC--separate and apart from its authority to
    liquidate banks--to take over and either wind down or act as a
    receiver for large, complex financial institutions that are in
    default or in danger of default, and whose failure would
    threaten the financial system. The FDIC would have the
    authority to make loans to a failing firm, guarantee the
    obligations of a failing firm to its creditors, acquire common
    or preferred shares in a failing firm, take a security interest
    in the assets of a failing firm, and sell assets that the FDIC
    has acquired from a failing firm. This authority, as it relates
    to an individual firm, would be temporary and would last until
    the firm was placed in receivership and liquidated. The
    dissolution process would not affect financial institution
    liquidation processes already in place, such as federal deposit
    insurance, Securities Investor Protection Corporation (SIPC)
    protection, and state insurance insolvency regimes.
        The FDIC would also have the authority to liquidate the
    company's assets and organize a bridge financial company, or
    merge the financial institution with another company, or
    transfer its assets and any liabilities. A maximum of $200
    billion would be available to the FDIC to dissolve failing
    firms; $150 billion would come from a Systemic Dissolution Fund
    that would be pre-funded by assessments on financial companies
    with more than $50 billion in assets and by hedge funds with
    more than $10 billion in assets. Assessments would be risk-
    based, so that more complex institutions engaged in riskier
    activities would pay more. The remaining $50 billion could come
    from the Treasury's general fund, as borrowing that would be
    paid back through industry assessments, and would be available
    only upon approval from Congress.
        The FDIC's resolution authority could only be employed to
    ensure broader financial stability and not solely to preserve a
    particular failing institution. Shareholders in a failing
    institution would not recoup any losses from the fund. The FDIC
    would also be required to remove management responsible for the
    company's failure. Companies placed into receivership by the
    FDIC would be subject to the executive compensation limits
    included in EESA (Pub. L. 110-343).
        Under the House bill, the FDIC's appointment as receiver of
    a financial institution would terminate at the end of one year,
    with the ability to extend the appointment for two one-year
    periods. The FDIC's general receivership authority would sunset
    on December 31, 2013, unless Congress approved a joint
    resolution extending the authority.
        In addition, the bill would also create a Consumer
    Financial Protection Agency to oversee institutions providing
    financial services and products to consumers, provide the
    Securities and Exchange Commission (SEC) with expanded powers
    including the ability to regulate the over-the-counter
    derivatives market, require hedge funds and other private pools
    of capital to register with the SEC, and introduce new
    regulations for credit rating agencies.
        Republicans in the House unanimously opposed H.R. 4173. In
    the area of resolution authority, some Republican members
    criticized the systemic risk-related supervisory powers that
    the bill granted to the Board of Governors of the Federal
    Reserve, a criticism that was shared by some House Democrats.
    The Federal Reserve's recent regulatory record and failure to
    anticipate the bursting of the housing bubble give critics
    little faith that the Federal Reserve will be an effective
    agent for identifying and regulating systemic risk.\705\ The
    Federal Reserve's mission, in their view, should be modified to
    focus solely on monetary policy. In addition, some Republicans
    argue, although the bill is allegedly designed to end the too
    big to fail phenomenon, it in fact gives the federal government
    unlimited authority to prop up ailing financial institutions
    through the new powers granted to the FDIC and the Council. And
    although the identity of those firms deemed to pose a systemic
    risk is supposed to remain confidential, SEC disclosures and
    changes in the identified firms' behaviors or strategies could
    make it relatively easy for market watchers to discern which
    firms are listed, according to the bill's critics. Such a
    designation would foster favoritism and reduce competition in
    the marketplace, providing an advantage to the firms with the
    special designation. Finally, critics assert that by funding
    the Systemic Dissolution Fund through assessments on all
    financial companies with over $10 billion in assets, the bill
    would penalize stable, profitable firms by making them pay for
    the resolution of failed firms.\706\
    ---------------------------------------------------------------------------
        \705\ House Republican Conference, Democrat Systemic Risk
    Legislation--Permanent Bailout Mania for the Politically Significant
    (Nov. 16, 2009) (online at www.gop.gov/policy-news/09/11/16/democrat-
    systemic-risk-legislation) (hereinafter ``House Republican Conference
    on Systemic Risk'').
        \706\ The Republican Cloakroom, Republican Leader John Boehner,
    Statement of Republican Policy, H.R. 4173, Wall Street Reform and
    Consumer Protection Act (Dec. 9, 2009) (online at http://
    repcloakroom.house.gov/news/DocumentSingle.aspx?DocumentID=159983).
    ---------------------------------------------------------------------------
        The favored alternative of House Republicans is H.R. 3310,
    a bill sponsored by the ranking member of the House Financial
    Services Committee, Representative Spencer Bachus. The
    Republican-sponsored Consumer Protection and Financial
    Regulatory Enhancement Act would create a Market Stability and
    Capital Adequacy Board, chaired by the Secretary of the
    Treasury, to examine interactions of various areas of the
    financial system, and to issue recommendations to policymakers
    and regulators to stem potential systemic risk. This bill would
    also provide the FDIC with enhanced resolution authority for
    large banks and create a new chapter of the Bankruptcy Code for
    failing non-financial institutions.\707\ This new chapter would
    facilitate coordination between regulators and the courts to
    ensure technical and specialized expertise is applied when
    dealing with complex institutions. Bankruptcy judges under this
    proposal would also have the power to stay claims by creditors
    and counterparties to prevent runs on troubled institutions.
    ---------------------------------------------------------------------------
        \707\ Protection and Regulatory Enhancement Act, H.R. 3310, 111th
    Cong., 1st session (2009).
    ---------------------------------------------------------------------------
                c. Senate Bill
        On November 10, 2009, Senate Banking Committee Chairman
    Christopher Dodd (D-CT) unveiled a discussion draft for
    comprehensive financial regulatory reform.\708\ Unlike the
    House Financial Services Committee, which passed the components
    of the regulatory reform bill in piecemeal fashion, Senator
    Dodd intends to report one bill out of committee. Senator
    Dodd's discussion draft proposes even more sweeping changes to
    the current financial regulatory framework than the bill that
    passed the House. For example, it would consolidate all federal
    banking regulation in one agency, the newly created Financial
    Institutions Regulatory Administration (FIRA).
    ---------------------------------------------------------------------------
        \708\ Discussion Draft (online at banking.senate.gov/public/_files/
    AYO09D44_xml.pdf).
    ---------------------------------------------------------------------------
        In order to address systemic risk, the discussion draft
    would enact regulatory measures similar to those in the House
    bill, but it would employ a much different institutional
    structure. Rather than an inter-agency council of regulators,
    Senator Dodd's proposal would create an independent Agency for
    Financial Stability (AFS) responsible for identifying,
    monitoring, and addressing systemic risks posed by large,
    complex companies as well as products and activities that can
    spread risk throughout the financial system. The agency would
    be governed by a board of nine members and led by an
    independent chairman, appointed by the President and confirmed
    by the Senate.\709\ The agency would collect and analyze data
    on emerging risks to the financial system and would be
    empowered to set strict prudential standards for firms
    identified as systemically important. Enhanced resolution
    authority would be vested in the FDIC for companies that
    continued to pose a systemic risk.
    ---------------------------------------------------------------------------
        \709\ The board would include the secretary of the Treasury; chair
    of the Federal Reserve; the chair of the Financial Institutions
    Regulatory Administration; head of the Consumer Financial Protection
    Agency; chair of the Securities and Exchange Commission; chair of the
    Federal Deposit Insurance Corporation; chair of the Commodity Futures
    Trading Commission; and independent members, including the chair,
    appointed by the President and confirmed by the Senate.
    ---------------------------------------------------------------------------
        Under Senator Dodd's proposal, the Agency for Financial
    Stability would be empowered to regulate certain financial
    companies, upon a determination by the Agency that the material
    financial distress or failure of such a firm would pose a
    threat to financial stability and economic growth. The agency
    would establish prudential standards and reporting and
    disclosure requirements on a graduated scale based on the size
    and complexity of each firm. The prudential standards would
    include risk-based capital requirements, leverage limits,
    liquidity requirements, concentration limits, and prompt
    corrective action requirements. In addition, the companies
    would be required to establish a Board-level risk committee
    responsible for the oversight of the enterprise-wide risk
    management practices of the company. The companies would also
    be required to issue a minimum amount of contingent capital,
    long-term hybrid debt convertible to equity if a company fails
    to meet prudential standards or its conversion is deemed
    necessary by the AFS to preserve financial stability.
        Each specified financial company would be required to
    develop a plan for the rapid and orderly dissolution of the
    company in the event of material financial distress or failure.
    The company would report periodically to the AFS, FIRA, and
    FDIC on the resolution plan, as well as the nature and extent
    of the company's credit exposure and indebtedness to other
    financial companies. Upon review of the resolution plan and
    credit exposure reports, FIRA and FDIC could jointly determine
    that a resolution plan is not credible and require the company
    to resubmit a revised plan. If the company failed to provide a
    satisfactory plan within a specified timeframe, FIRA and FDIC
    could impose more stringent prudential requirements and
    restrict certain growth, activities, and operations. In
    consultation with AFS, the company could also be required to
    sell certain assets and business operations.
        Bank holding companies with total assets of over $10
    billion would automatically be subject to heightened prudential
    standards and reporting and disclosure requirements without the
    need for an AFS evaluation of their systemic significance. The
    stringency of the heightened standards, which would include
    risk-based capital, leverage, and liquidity requirements, would
    increase on a graduated scale based on the size of the company.
    The bank holding companies would be required to establish a
    risk committee to oversee all risk-management practices.
        The Dodd proposal gives FIRA, with FDIC serving as
    receiver, the authority to break up firms posing a systemic
    risk on a case-by-case basis. Following consultation with AFS
    and FIRA, FDIC would have a range of options at its disposal
    for resolving the institution, including making loans,
    purchasing debt obligations, purchasing or guaranteeing assets,
    purchasing an equity stake, taking a lien on any or all assets,
    or liquidating the company by selling or transferring all of
    its assets, liabilities, obligations, equity interests, or
    securities.
        Senator Dodd's proposal stipulates that any exercise of the
    enhanced resolution authority must be for the purpose of
    financial stability and not for the purpose of rescuing or
    preserving a particular company. Shareholders in the company
    would not be eligible to recoup their investment until all
    other claims are fully paid. The FDIC would be required to
    ensure that the management responsible for the failed condition
    of the company be removed. If proceeds from the sale of the
    company or its assets were insufficient to cover the costs of
    the resolution, the difference would be recouped from
    assessments on financial companies with assets of over $10
    billion.
        Shortly after Senator Dodd released his discussion draft,
    Senator Richard Shelby, the ranking member of the Senate
    Banking Committee, announced his opposition to the bill and his
    intention to draft his own alternative bill, in particular
    because of his opposition to the creation of a Consumer
    Financial Protection Agency and his view that the legislation
    would institutionalize permanent bailout authority for the
    government.\710\ Senator Dodd has agreed to work with Senator
    Shelby and other Republicans on the Banking Committee in order
    to arrive at a bipartisan bill. The two sides are currently
    negotiating.
    ---------------------------------------------------------------------------
        \710\ Senate Committee on Banking, Housing, and Urban Affairs,
    Opening Statement of Senator Richard Shelby, Mark Up: Restoring
    American Financial Security Act, 111th Cong. (Nov. 19, 2009) (online at
    shelby.senate.gov/public/index.cfm?FuseAction=PressRoom.Speeches&
    ContentRecord_id=0da23880-802a-23ad-45c9-
    2c06baab4f5f&Region_id=&Issue_id=&County_id=).
    ---------------------------------------------------------------------------

                       H. Conclusions and Recommendations

        Treasury holds, on behalf of the American taxpayer, a
    diverse collection of assets that it must dispose of with all
    deliberate speed, transparency, and good stewardship. In
    general Treasury has made progress toward meeting these
    requirements, but it could improve certain aspects of its
    performance.

    Strengthen Transparency and Accountability

        In its past oversight reports, the Panel has repeatedly
    urged Treasury to disclose greater detail about the goals,
    metrics, and future plans for the programs that it has launched
    and operated under the TARP. This same exceptional degree of
    transparency will remain critical as Treasury exits the TARP.
        In particular, Treasury should disclose to the public more
    information about its plan for disposing of its assets. There
    are some details that Treasury either cannot disclose (because
    of the need to comply with securities laws, for example, or the
    need to work with banking regulators using confidential
    information) or should not disclose (because of the need to
    time the market for asset sales). Treasury should, however, be
    transparent with respect to the constraints under which it
    operates (for example, any limits to Treasury's authority on
    how and when to sell assets) and how it will balance its
    sometimes conflicting obligations to maintain systemic
    stability, preserve the stability of individual institutions,
    and maximize taxpayers' return on investment. Treasury should
    also disclose the metrics that it is using to determine timing
    and manner of sales, and Treasury should publicly explain its
    objectives so the American people can measure its success.\711\
    Though it is the banking regulators' responsibility to disclose
    their criteria for allowing repayments, Treasury also should be
    able to articulate this policy in view of the broader economic
    issues it raises. This lack of clarity breeds uncertainty and
    instability in the financial markets and provides a disservice
    to taxpayers as well as investors.
    ---------------------------------------------------------------------------
        \711\ See also COP September Oversight Report, supra note 108, at
    112.
    ---------------------------------------------------------------------------
        Treasury should be particularly transparent with respect to
    any plans to acquire additional assets or obligations under the
    TARP, whether as a result of the TARP programs under which
    money remains to be expended, or as a result of arrangements
    with other governmental entities. If, for example, Treasury
    were to acquire any of the assets that the Federal Reserve has
    acquired as a result of its market interventions, those
    arrangements, and Treasury's plans for disposition of those
    assets, should be subject to the same transparency
    considerations discussed above.
        Reprising a theme of the Panel's September report, Treasury
    should also be more transparent with respect to corporate
    governance issues, including management succession issues, and
    provide greater detail about the circumstances in which
    Treasury will be involved in business decisions with respect to
    its investee companies.\712\ Greater clarity will help to
    reassure both taxpayers and market participants about the scope
    of Treasury's role as a major investor in the private sector.
    ---------------------------------------------------------------------------
        \712\ See COP September Oversight Report, supra note 108, at 102.
    ---------------------------------------------------------------------------
        Because of the unprecedented nature of the TARP and the
    many challenges involved in executing the sale of such an
    enormous pool of assets, transparency is crucial to Treasury's
    credibility and to the functioning of the markets in which
    Treasury is now a key participant.

    Demand Greater Transparency from TARP Participants

        The need for greater transparency in TARP programs is not
    limited to Treasury. Many TARP-recipient financial institutions
    have provided very limited disclosures about their use of TARP
    funds, denying taxpayers the opportunity to account precisely
    for their tax dollars.
        Any future recipient of TARP funds, including banks
    participating in the small business initiative, must be
    obligated to give a complete accounting of what they did with
    the money and how those actions served the objectives of the
    TARP.

    Improve Operations to Protect Taxpayers

        Exiting the TARP will be a lengthy and demanding process,
    and a successful exit will require that Treasury have expertise
    in complex markets and instruments. Treasury should take steps
    to ensure that it will continue to be staffed, through final
    exit from the TARP, with qualified and expert personnel.
    Treasury should also give due consideration to each stage of
    its exit strategy, including how it will handle the period in
    the future when only a few recipients are left in the system.
        Treasury should also be frank in addressing the potential
    for conflicts of interest in light of the government's dual
    role as investor and overseer of the financial industry. To
    limit any conflicts of interest and facilitate an effective
    exit strategy, Treasury should continue to consider holding its
    TARP assets in a trust that would be insulated from political
    pressure and government interference, especially as
    circumstances change. Any such trust, however, should address
    the concerns discussed above, which have been raised by
    Professor Verret and others, so that the trust assets are
    managed in the best interests of taxpayers.
        Treasury should provide quarterly TARP financial
    statements, and consider improving the readability of its
    Management's Discussion and Analysis.

    Take Steps to Resolve Implicit Guarantees

        Perhaps the largest problem that Treasury faces is one that
    Treasury cannot solve alone: the continued existence of a broad
    implicit guarantee that hangs over the markets. There are
    multiple options available and there is broad agreement that a
    new approach to systemic risk regulation is necessary so that
    businesses are not insulated from the effects of their own bad
    decisions.
        In the aftermath of the government's extraordinary economic
    stabilization efforts, markets may believe that too big to fail
    financial institutions operate under an implicit guarantee:
    that the American taxpayer would bear any price, and absorb any
    loss, to avert a financial meltdown. To the degree that lenders
    and borrowers believe that such an implicit guarantee remains
    in effect, moral hazard will continue to distort the market in
    the future, even after TARP programs wind down. As Treasury
    contemplates an exit strategy for the TARP and similar
    financial stability efforts, addressing the implicit guarantee
    of government support is critical.
                         SECTION TWO: ADDITIONAL VIEWS

                                A. Damon Silvers

        The Panel's January Report is an extraordinarily detailed
    survey of many issues associated with the windup of the
    programs created under the Emergency Economic Stabilization Act
    of 2008. Because of the breadth of the Report, I think it is
    important to express in one place clearly what I see as the
    problem with the direction the TARP has taken in recent weeks.
        In the course of several weeks in December 2009, the Board
    of Governors of the Federal Reserve announced it was allowing
    three of the nation's largest banks to return their TARP
    monies--allowing Bank of America and Wells Fargo to escape
    TARP's limitations on executive pay, and allowing Citigroup to
    escape the extraordinary limits on executive pay associated
    with institutions receiving extraordinary aid, even though
    Citigroup continued to be the beneficiary of tens of billions
    of TARP funds in the form of common stock. Citigroup is now the
    only company in which the TARP holds common stock that is not
    subject to the rulings of the Special Master on Executive Pay.
        But despite the intense interest that the executives of
    Citigroup, Bank of America and Wells Fargo appeared to have in
    the executive pay issue, that issue is a secondary one in
    relation to the repayment decision. The real issues are about
    systemic stability and moral hazard.
        In relation to systemic stability the question is--are
    these banks really sound after repayment? Given their enormous
    size, if they are not sound after repayment allowing them to
    repay would be a profoundly irresponsible act, making another
    systemic financial crisis far more likely. Then there is the
    question of these large banks' ability to withstand future
    economic and financial turmoil. It would not be good for the
    country if it turned out that these repayment transactions were
    high stakes bets on continued economic and financial stability.
        It is very important that the public and Congress
    understand that the Congressional Oversight Panel has no
    ability to answer this critical question because (1) we have
    never received, despite repeated requests, the algorithms at
    the heart of the stress tests (see our earlier hearings and our
    correspondence with Secretary Geithner); (2) we were unable to
    determine the extent of or the value of the toxic assets that
    continue to be held by the major banks (see our August 2009
    report) and (3) because the bank regulators have never
    disclosed the criteria for allowing repayment.
        Following the stress tests, each of these three banks began
    to press to be allowed to repay their TARP funds. Because we do
    not know what the criteria were for being allowed to repay, it
    is impossible to know when they met them. But it is puzzling to
    note that in the case of Wells Fargo and Bank of America, the
    result of bank regulators allowing repayment transactions not
    entirely funded by new equity was to reduce those banks' Pro
    forma Tier 1 capital ratios, a basic measure of bank capital
    strength, to below the level that it had been at these banks at
    the end of the second quarter of 2009, when the Treasury
    steadfastly refused to permit them to repay TARP funds. One
    explanation for the regulator opposing transactions that
    weakened Tier I capital is that the regulators were exclusively
    focused on measures of common equity capital strength. But an
    approach focused on common stock is odd in the context of the
    fact that all of TARP's efforts to strengthen bank capital have
    involved preferred stock infusions.
        Then there is Citigroup. While our conversations with
    Treasury and others on this matter are ongoing, we have yet to
    receive a satisfactory explanation for how it is possible that
    Citigroup, which had a Tier 1 capital ratio of 11.92 percent at
    the end of 2008, and was generally understood to be the walking
    dead, is now healthy enough to be let out of TARP with a Pro
    forma Tier 1 capital ratio post-repayment of 11.0 percent.
    Citigroup gets more puzzling in light of several other facts:
    Citigroup posted net losses available to common shareholders in
    the first and third quarters of 2009, and most analysts believe
    it will lose money in the fourth quarter; its equity offering
    ran into trouble; its stock price post-repayment is just over
    $3 per share; and its total preferred and common equity market
    capitalization is the same as it was at the beginning of 2009.
    Of course, by converting the majority of its TARP preferred to
    common, then selling common to replace preferred at the close
    to option value price of $3.25, Citigroup has been able to
    raise its common equity ratios significantly. But does trading
    government preferred stock for government common stock
    transform a sick bank into a healthy bank?
        As to moral hazard, repayment converts what had been a
    time-buying strategy into a fait accompli. We now know for
    certain that, barring another systemic crisis requiring
    revisiting these issues, the public has definitely rescued the
    shareholders, bondholders and executives of these large banks
    from the consequences of their actions. What is far less clear
    is whether as a result we have strong, stable banks able to
    play their proper role as provider of credit to the real
    economy.

    Note on Recusal

        In July, 2009, I recused myself from participation in any
    Panel discussions about and votes on matters pertaining to
    General Motors, Chrysler or their financial affiliates,
    including but not limited to GMAC. I did not vote on or
    participate in discussions related to the Panel's September
    Report, The Use of TARP Funds in Support and Reorganization of
    the Domestic Automotive Industry. My vote in favor of this
    Report and the Panel's December Report, entitled Taking Stock:
    What Has the Troubled Asset Relief Program Achieved? should not
    be taken as an expression of opinion on sections of the report
    dealing with General Motors, Chrysler, or their financial
    affiliates. Lastly, my votes in favor of this report and the
    December Report were addressed only to those portions of the
    reports that did not relate to General Motors, Chrysler, or
    their financial affiliates.

                    B. J. Mark McWatters and Paul S. Atkins

        We concur with the issuance of the January report and offer
    additional observations below. We thank the Panel for
    incorporating suggestions offered during the drafting process.

    1. Executive Summary

        We offer the following summary of our analysis:
               Treasury should request that each TARP
            recipient submit a formal exit strategy and update such
            strategy each calendar quarter. Treasury should also
            provide the Panel with its written assessment of the
            exit strategies and updates submitted by the TARP
            recipients.
               In order to expedite the swift metamorphosis
            of many TARP recipients from insolvent to investment
            grade, the institutions were arguably subsidized
            through government-sponsored purchases of mortgage-
            backed securities and by the all but unlimited
            investment of (and commitment to invest) public funds
            in Fannie Mae, Freddie Mac and AIG. One may argue that
            the government has created without meaningful public
            debate or analysis a series of ``bad banks'' within the
            Federal Reserve, Treasury, Fannie Mae, Freddie Mac, and
            AIG to accomplish what TARP alone failed to achieve.
            These ``bad banks'' or, perhaps, ``debt consolidation
            entities'' operate by actually and virtually removing
            toxic assets from the books of TARP recipients and
            other holders and issuers. The Federal Reserve and
            Treasury have actually removed up to $1 trillion of
            troubled assets from the books of TARP recipients and
            other holders and issuers through outright purchases.
            The Federal Reserve and Treasury have also virtually
            removed additional troubled assets from the books of
            TARP recipients and other holders and issuers by
            propping up the market values of such assets and
            maintaining historically low mortgage rates.
               A question arises as to whether the
            termination of the AIG credit default swaps (CDSs) at
            par--that is, without any discount or haircut--
            constituted an inappropriate subsidy of the AIG
            counterparties--which included TARP recipients Goldman
            Sachs, Merrill Lynch and Bank of America--and
            necessitated the investment of additional TARP funds in
            AIG. Although then-FRBNY President Geithner denies that
            the payments by the Federal Reserve Bank of New York
            (FRBNY) constituted a ``backdoor bailout'' of the AIG
            counterparties, without any other explanation it is
            difficult to conclude that the FRBNY insisted that AIG
            terminate the CDSs other than as a mechanism to provide
            a direct--yet not particularly transparent--government-
            sponsored subsidy to the AIG counterparties. Without a
            better explanation of a straightforward business
            purpose for these transactions, the taxpayers may be
            best served by having Treasury seek recission from the
            AIG counterparties, reversing cancellation of the CDS
            contracts and requiring the counterparties to purchase
            the underlying collateralized debt obligations (CDOs)
            at their $62.1 billion par value.
               Since Treasury is charged with protecting
            the interests of the taxpayers who funded the Home
            Affordable Modification Program (HAMP) and the other
            TARP programs, we recommend that Treasury's foreclosure
            mitigation efforts be structured so as to incorporate
            an effective exit strategy by allowing Treasury to
            participate in any subsequent appreciation in the home
            equity of any mortgagor whose loan is modified under
            HAMP or any other taxpayer subsidized program.

    2. Required Submission of Proposed Exit Strategies by TARP Recipients

        One job of effective oversight is to assess the exit
    strategies proposed by TARP recipients and Treasury. In
    discharging this responsibility the Panel undertook in the
    January report to analyze (i) how each major TARP recipient
    plans to repay its TARP funds, (ii) how Treasury expects to
    recoup the TARP funds advanced to each major TARP recipient,
    and (iii) each of these strategies for transparency,
    effectiveness and taxpayer protection. The January report
    serves as an intermediate step in an ongoing process, the
    ultimate effectiveness of which will depend upon the
    transparency and accountability of the disclosure provided by
    the TARP recipients and Treasury. The Panel cannot claim unique
    expertise regarding the wide array of financial institutions
    and non-financial institutions, such as Chrysler and General
    Motors, which have accepted TARP funds and, as such, must rely
    to a significant extent upon good faith submissions by TARP
    recipients and Treasury.
        In our view, Treasury should request that each TARP
    recipient submit a formal exit strategy and update such
    strategy each calendar quarter. Treasury should also provide
    the Panel with its written assessment of the exit strategies
    and updates submitted by the TARP recipients. Because Treasury
    has stated that it has a ``reluctant shareholder'' investment
    strategy, the Panel and its staff, together with outside
    experts and advisors, should commit periodically to offer
    updated assessments of the proposed exit strategies for major
    TARP recipients as an addendum to the Panel's monthly reports.
    In our view, Treasury should exit each TARP investment as soon
    as possible,\713\ and apply all proceeds received with respect
    to each TARP investment permanently to repay the national
    debt.\714\
    ---------------------------------------------------------------------------
        \713\ It does not appear, however, that Treasury in fact is
    operating as a reluctant shareholder in all instances. The investment
    of yet another $3.8 billion in GMAC--an apparently non-systemically
    significant financial institution--indicates a contrary strategy.
    Treasury's exit strategy with respect to GMAC remains a mystery. In
    addition, although the Panel in reports predating our membership on the
    Panel, has encouraged Treasury to hold its TARP investments in a series
    of trusts, as the January report acknowledges, such a structure is
    problematic and we cannot recommend it.
        \714\ Treasury has interpreted TARP as a ``revolving facility''
    pursuant to which payments received under the program may be recycled
    and remitted to other TARP recipients. We disagree with this analysis
    and contend that all such payments should be applied permanently to
    repay the national debt.
    ---------------------------------------------------------------------------

    3. The Repayment of TARP Funds

        It is encouraging that several of the most significant
    recipients of TARP funds have been permitted by their
    regulators \715\ to repay their TARP advances.\716\ It is more
    satisfying that many of these recipients have funded their
    redemptions by successfully accessing the private capital
    markets. We remain optimistic that many--if not most--of these
    former TARP recipients will not return to business-as-usual,
    but will endeavor to operate with best practices in corporate
    governance and risk management guidelines and policies.
    ---------------------------------------------------------------------------
        \715\ We assume the applicable regulators have analyzed the many
    challenges facing financial institutions, including, without
    limitation, (i) rising credit card, consumer and home equity loan
    defaults, (ii) rising commercial real estate and private equity/
    leveraged buyout loan defaults, (iii) the loss of traditional profits
    centers due to recent regulatory changes, and (iv) the fall in loan
    demand from borrowers. See Loan-Rate Differences are Challenges for
    Banks, Wall Street Journal (Jan. 4, 2010) (online at online.wsj.com/
    article/SB10001424052748704162104574630570328742070.html).
        \716\ Recipients of TARP funds appear eager to exit the program
    most likely because of the executive compensation restrictions as well
    as the general stigma associated with participation in the program and
    the risk that Congress and Treasury will mandate the application of
    additional adverse laws and regulations to such recipients.
    ---------------------------------------------------------------------------
        As the December Report discussed, TARP is only a small part
    of the total activity of the federal government to intervene in
    the financial markets in 2008, including larger government
    programs instituted by the Federal Reserve and the FDIC. TARP
    amounted to approximately 10 percent of the total exposure of
    the taxpayer.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Thus, we are troubled that some may view TARP as
    monochromatic whereby any institution that receives regulatory
    approval to redeem its TARP advances must necessarily be
    financially stable. This may not be the case. It is possible
    that but for the other programs and intervening events, many
    TARP recipients would not have been financially strong enough
    to receive regulatory clearance to exit TARP.
        Financial institutions (and the automobile companies) have
    received many direct and indirect financial and regulatory
    subsidies, including:
             The support of TARP recipients by the Federal
            Reserve and Treasury with non-TARP sourced funds; and
             The settlement of AIG credit default swap
            obligations with certain TARP recipients at par value
            (i.e., without any discount).
        It is possible that these subsidies contributed to the
    alleged transformation of a group of essentially insolvent
    banks in 2008 into non-TARP dependent financial institutions by
    the end of 2009. These subsidies were delivered at significant
    cost, and the taxpayers--not the TARP recipients--will most
    likely ultimately bear those costs.\717\
    ---------------------------------------------------------------------------
        \717\ It is also likely that a series of unintended consequences--
    such as the establishment of the United States government as the
    implicit/explicit guarantor of certain ``too big to fail''
    institutions--will gain sounder footing from these investments. We do
    not support the recently announced proposal to levy a special tax, fee
    or assessment against financial institutions. Such a levy could impede
    lending in an already tight credit market.
    ---------------------------------------------------------------------------
        We have heard much lately about the success of TARP and how
    the Capital Purchase Program--the original bailout program for
    approximately 700 financial institutions--may actually yield an
    overall net profit. This assessment appears premature and
    inappropriate. The final operating results of TARP should not
    be tallied without including the costs of the other subsidies
    afforded TARP recipients by the Federal Reserve, Treasury,
    Fannie Mae, Freddie Mac, and AIG (channeling Federal Reserve
    money).
                a. Support by the Federal Reserve and Treasury of TARP
                        Recipients
        Fannie Mae and Freddie Mac together own or guarantee
    approximately $5.5 trillion of the $11.8 trillion in U.S.
    residential mortgage debt and financed as much as 75 percent of
    new U.S. mortgages during 2009.\718\ On December 24, 2009,
    Treasury announced that it would provide an unlimited amount of
    additional assistance to the two government-sponsored
    enterprises (GSEs) as required over the next three years.\719\
    Treasury apparently took this action out of concern that the
    $400 billion of support that it previously committed to the
    GSEs could prove insufficient. Additional assistance by
    Treasury will also allow the GSEs to honor their mortgaged-
    backed securities (MBS) guarantee obligations and to absorb
    further losses from the modification or write down of
    distressed mortgage loans.\720\ Treasury also revised upwards
    to $900 billion the cap \721\ on the retained mortgage
    portfolio of each of the GSEs which means the GSEs will not be
    forced to sell MBS into a distressed market just as the Federal
    Reserve is preparing to end its program to purchase up to $1.25
    trillion of MBS.\722\ The increased commitment and revised cap
    enhance the likelihood that the GSEs will undertake to make
    ``large-scale'' purchases of distressed MBS for which they
    provided a guarantee.\723\ Presumably, the GSEs may make such
    purchases from TARP recipients and other holders and issuers,
    and it will be interesting to note how the GSEs elect to employ
    the proceeds of this unlimited facility.
    ---------------------------------------------------------------------------
        \718\ Dawn Kopecki, Mortgage Anxieties Mean Limbo for Fannie and
    Freddie (Update 2), Bloomberg (Dec. 28, 2009) (online at
    www.bloomberg.com/apps/news?pid=newsarchive&sid=aLEn75100iNg#).
        \719\ U.S. Department of the Treasury, Treasury Issues Update on
    Status of Support for Housing Programs (Dec. 24, 2009) (online at
    www.treasury.gov/press/releases/2009122415345924543.htm).
        \720\ Nick Timiraos, Questions Surround Fannie, Freddie, Wall
    Street Journal (Dec. 30, 2009) (online at online.wsj.com/article/
    SB20001424052748704234304574626630520798314.html#mod=
    todays_us_money_and_investing).
        \721\ The revised number should not be viewed as a ``cap'' since
    Treasury may again elect to increase the amount of retained MBS.
        \722\ Nick Timiraos, Questions Surround Fannie, Freddie, Wall
    Street Journal (Dec. 30, 2009) (online at online.wsj.com/article/
    SB20001424052748 704234304574626630520798314.
    html#mod=todays_us_money_and_investing).
        ``The relaxed portfolio limits calmed investor worries that Fannie
    and Freddie would be forced to sell some of their mortgage holdings
    just as the Federal Reserve was preparing to wind down its purchases of
    mortgage-backed securities next spring. The Federal Reserve's
    commitment to buy up to $1.25 trillion has helped to keep mortgage
    rates near record lows; without that support some economists have said
    that could rise to 6% by the end of 2010.
        Others said the new flexibility means that Fannie and Freddie could
    replace the Federal Reserve as a big buyer of mortgage-backed
    securities, especially if weak demand for mortgage-backed securities
    from private investors drives rates higher.''
        \723\ Jody Chenn, Fannie Changes Clear Way for `Large-Scale'
    Buyouts (Update 1), Bloomberg (Dec. 28, 2009) (online at
    www.bloomberg.com/apps/news?pid=newsarchive&sid=aA7QrMCZHhRs#).
    ---------------------------------------------------------------------------
        As reflected on its November 25, 2009 balance sheet, the
    Federal Reserve System holds $155 billion face-value federal
    agency debt securities representing the direct obligations of
    Fannie Mae, Freddie Mac and the Federal Home Loan Banks, and
    $852 billion of face-value MBS representing securities
    guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Since
    November 26, 2008, the Federal Reserve has increased its
    holdings of federal agency debt securities by $143 billion, and
    the $852 billion of MBS is entirely new since that date.\724\
    In addition, Treasury anticipates that as of December 31, 2009,
    it will have purchased $220 billion of GSE-guaranteed MBS under
    the Housing and Economic Recovery Act of 2008 (HERA).\725\
    ---------------------------------------------------------------------------
        \724\ Board of Governors of the Federal Reserve System, Federal
    Reserve System Monthly Report on Credit and Liquidity Programs and
    Balance Sheet (Dec. 2009) (online at federalreserve.gov/monetarypolicy/
    files/monthlyclbsreport200912.pdf).
        \725\ U.S. Department of the Treasury, Treasury Issues Update on
    Status of Support for Housing Programs (Dec. 24, 2009) (online at
    www.treasury.gov/press/releases/2009122415345924543.htm).
    ---------------------------------------------------------------------------
        It does not seem unreasonable to conclude that the actions
    of Treasury and the Federal Reserve in support of the MBS
    market and the GSEs also offered material assistance to many
    TARP recipients and expedited the exit of some recipients from
    the TARP.\726\ By directly and indirectly (through the GSEs)
    funding the acquisition of MBS \727\ from TARP recipients and
    other holders and issuers, Treasury and the Federal Reserve
    added liquidity to an all but frozen MBS market and no doubt
    enhanced the trading value of such securities. It is difficult
    to imagine that the Federal Reserve's public commitment to
    purchase up to $1.25 trillion of MBS did not materially move
    the market and permit holders of MBS--including TARP
    recipients--to liquidate their investments at more favorable
    pricing. Even if the Federal Reserve ends its program to
    purchase MBS within the next few months \728\ the GSEs could
    potentially pick up the slack by funding the acquisition of MBS
    through Treasury's recently announced expansion of its
    commitment to the GSEs. Further, by funding Fannie Mae's and
    Freddie Mac's performance of their MBS guarantee obligations,
    Treasury has directly supported the MBS market and, as such,
    quite likely improved the net worth of many TARP recipients.
    Similarly, by purchasing MBS and GSE-issued mortgage bonds, the
    Federal Reserve has kept mortgage rates near historic
    lows,\729\ thereby facilitating mortgage loan originations and
    refinancings and lessening the default rate on existing
    adjustable rate mortgage loans--all of which have benefited
    many TARP recipients.
    ---------------------------------------------------------------------------
        \726\ This is not to say that the overarching purposes and
    mechanics of the Treasury and Federal Reserve programs are necessarily
    transparent. A number of questions--without limitation--are presented.
         What is the authority for Treasury's unlimited assistance
    to the GSEs?
         Will the GSEs continue to use funds contributed by
    Treasury to guarantee the MBS purchased by the Federal Reserve?
         If so, are the taxpayers--through Treasury's recently
    announced unlimited capital commitment to the GSEs--in effect bailing
    out the Federal Reserve for its efforts to create a liquid one-buyer
    market for MBS?
         Is one of the principal purposes of these circular
    purchases, capital infusions and guarantee payments simply to remove
    MBS from the books of TARP recipients (the original purpose of TARP)
    and other holders and issuers at favorable prices to the sellers?
         Is the Federal Reserve in effect bailing out TARP
    recipients and other holders and issuers of MBS?
         If so, will this action also placate foreign sovereigns
    and other holders and issuers that acquired GSE guaranteed MBS with the
    understanding that it was full faith and credit paper of the United
    States government?
         Have the purchases of MBS by the Federal Reserve coupled
    with the unlimited assistance from Treasury converted the implicit
    guarantee into an explicit guarantee of the GSEs by the United States
    government?
         If so, under what authority was such action taken?
         Has the Federal Reserve or Treasury purchased any MBS from
    any TARP recipient or other holder or issuer for consideration in
    excess of the then existing market value?
         If so, under what authority was such action taken?
        \727\ To the extent Treasury or the Federal Reserve purchased MBS
    from TARP recipients for consideration in excess of market value, it is
    possible that some or all of the spread should be classified as a
    subsidy--without an offsetting additional reimbursement obligation--for
    the benefit of the selling TARP recipients. We question whether many
    TARP recipients would have sold a material portion of their MBS
    portfolios for less than the original purchase price paid for the
    securities due to the adverse effect the recognition of any resulting
    losses would have had on their required capital ratios. In addition,
    these transactions would have provided lower ``marks'' for valuation
    purposes, which could have had significant adverse balance sheet and
    income statement effects under FAS 157. Thus, the revision of the mark-
    to-market accounting rules noted below in the text may have also
    encouraged TARP holders to defer any sales of MBS for consideration
    less than their original purchase price. In addition to the cash
    infusion generated from the sale of illiquid MBS at favorable prices,
    the selling TARP recipients may have been able to book trading profits
    from the MBS dispositions and it is possible that some TARP recipients
    generated material trading gains by purchasing distressed MBS at well
    below par and selling the securities to Treasury or the Federal Reserve
    at or near par. These transactions would have bolstered the recipient's
    capital and expedited its exit from TARP.
        The quantification of any such subsidy is not free from doubt since
    each MBS purchased by Treasury or the Federal Reserve apparently
    carried a GSE guarantee and presumably would have been paid pursuant to
    the terms of the guarantee contract assuming the guarantor remained
    solvent. Nevertheless, GSE guaranteed MBS presumably may trade below
    par if the guarantee obligation has not been triggered (or has only
    been partially triggered) and the disposition of any such MBS by a TARP
    recipient for consideration in excess of its prevailing market price
    may in certain instances be viewed as a subsidy to the selling
    recipient. The recognition of significant subsidies would have improved
    the financial position and operating results of TARP recipients and
    assisted their exit from the program. The cost of providing such
    subsidies to the TARP recipients will be borne by the taxpayers and not
    the recipients.
        \728\ Fed may re-enter MBS market later in 2010--Market News,
    Reuters (Jan. 5, 2010) (online at www.reuters.com/article/
    idUSN0530695520100105?type=marketsNews):
        ``The Federal Reserve is discussing re-entering the mortgage-backed
    securities market later this year if its buying power is needed to hold
    down interest rates, Market News said on Tuesday in a story citing Fed
    officials.
        The $5 trillion agency mortgage-backed securities market may weaken
    when last year's biggest buyer, the Federal Reserve, ends its $1.25
    trillion agency MBS purchasing program at the end of the first quarter
    of 2010.''
        See also, Fed Minutes Show Division on Emergency Steps, New York
    Times (Jan. 6, 2010) (online at www.nytimes.com/2010/01/07/business/
    07fed.html?hp); see also, Fed Plan to Stop Buying Mortgages Feeds
    Recovery Worries, Wall Street Journal (Jan. 8, 2010) (online at
    online.wsj.com/article/SB126291088200220743.html).
        \729\ Although the purchases have reduced the cost of capital of
    the GSEs and lowered mortgage rates, some analysts fear that the
    withdrawal of Federal Reserve support for the GSEs will lead to an
    ``asset collapse'' while others note that such concerns are
    ``overblown.'' See Mortgage Anxieties Mean Limbo for Fannie and Freddie
    (Update 2), Bloomberg (Dec. 28, 2009) (online at www.bloomberg.com/
    apps/news?pid=newsarchive&sid=aLEn75100iNg#); see also, Mortgage Bond
    Rally May End, Rates Rise as Fed Stops Purchases, Bloomberg (Dec. 31,
    2009) (online at www.bloomberg.com/apps/
    news?pid=20601087&sid=aukqYVzx6x3w&pos=4).
    ---------------------------------------------------------------------------
        In order to expedite the swift metamorphosis of many TARP
    recipients from insolvent to investment grade, the institutions
    were arguably subsidized through government-sponsored purchases
    of MBS and by the all but unlimited investment of (and
    commitment to invest) public funds in Fannie Mae, Freddie Mac
    and AIG. One may argue that the government has created without
    meaningful public debate or analysis a series of ``bad banks''
    within the Federal Reserve, Treasury, Fannie Mae, Freddie Mac
    and AIG \730\ to accomplish what TARP alone failed to achieve.
    These ``bad banks'' or, perhaps, ``debt consolidation
    entities'' operate by actually and virtually removing toxic
    assets from the books of TARP recipients and other holders and
    issuers. The Federal Reserve and Treasury have actually removed
    up to $1 trillion of troubled assets from the books of TARP
    recipients and other holders and issuers through outright
    purchases.\731\ The Federal Reserve and Treasury have also
    virtually removed additional troubled assets from the books of
    TARP recipients and other holders and issuers by propping up
    the market values of such assets and maintaining historically
    low mortgage rates.
    ---------------------------------------------------------------------------
        \730\ It is our understanding that many of the distressed assets of
    AIG are housed in a group of special purpose vehicles with the common
    name ``Maiden Lane LLC.''
        \731\ Treasury anticipates that it will have purchased
    approximately $220 billion face value of mortgage-backed securities
    guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae by December 31,
    2009, and the Federal Reserve's November 25, 2009 balance sheet
    discloses the purchase of $852 billion face value of mortgage-backed
    securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. See
    U.S. Department of the Treasury, Treasury Issues Update on Status of
    Support for Housing Programs (Dec. 24, 2009) (online at
    www.treasury.gov/press/releases/2009122415345924543.htm; see also,
    Board of Governors of the Federal Reserve System, Federal Reserve
    System Monthly Report on Credit and Liquidity Programs and Balance
    Sheet (Dec. 2009) (online at www.federalreserve.gov/monetarypolicy/
    files/monthlyclbsreport200912.pdf).
    ---------------------------------------------------------------------------
        Although Treasury and the Federal Reserve have arguably
    bolstered the net worth of many TARP recipients by purchasing
    MBS and investing in the two GSEs, much of the risk associated
    with Treasury's and the Federal Reserve's investments will fall
    to the taxpayers even though substantial benefits may inure to
    many TARP recipients. Such actions by Treasury and the Federal
    Reserve have all but enshrined the ``implicit guarantee'' of
    the United States government with respect to institutions that
    are deemed ``too big or too interconnected to fail'' and may
    have intentionally or inadvertently subsidized the early exit
    from TARP of many recipients at an increasing cost of the
    taxpayers.
                b. AIG and Credit Default Swap Payments
        On November 17, 2009, the Special Inspector General for
    TARP (SIGTARP) issued a report addressing the termination of
    certain AIG CDSs at par (SIGTARP Report).\732\ In order to
    close out the AIG CDSs the FRBNY remitted $27.1 billion to the
    AIG counterparties (CPs) in return for $62.1 billion of face
    value CDOs held by the CPs.\733\ The CPs were also permitted to
    retain $35 billion of cash collateral previously pledged by AIG
    pursuant to the CDSs. The CPs--which included TARP recipients
    Goldman Sachs, Merrill Lynch and Bank of America--were paid the
    full face value of their respective CDOs and the FRBNY failed
    in its efforts to receive a discount in payment from any
    CP.\734\
    ---------------------------------------------------------------------------
        \732\ Office of the Special Inspector General for the Troubled
    Asset Relief Program, Factors Affecting Efforts To Limit Payments to
    AIG Counterparties (Nov. 17, 2009) (online at www.sigtarp.gov/reports/
    audit/2009/Factors_Affecting_Efforts_to_
    Limit_Payments_to_AIG_Counterparties.pdf).
        \733\ Each AIG CDS was structured with the applicable CP based upon
    a unique set of facts. The noted description is, by necessity,
    simplified.
        \734\ The aggregate face amount of the underlying CDOs equaled
    $62.1 billion and the CPs received $27.1 billion from the FRBNY and
    were permitted to retain $35 billion of cash collateral previously
    pledged under the CDS contracts. Id.
    ---------------------------------------------------------------------------
        A question arises as to whether the termination of the CDSs
    at par--that is, without any discount or haircut--constituted
    an inappropriate subsidy of the CPs and necessitated the
    investment of additional TARP funds in AIG. According to the
    SIGTARP Report, the CPs refused to accept a discounted payment
    and terminate the CDSs for less than par because (i) the
    collateral previously posted under the CDS contracts ($35
    billion) plus the then fair market value of the CDOs ($27.1
    billion) equaled the full face value of the CDOs ($62.1
    billion), (ii) the United States government had clearly
    signaled that it would not permit AIG to fail and, therefore,
    the CDSs would be honored in full, (iii) certain CPs had hedged
    against a default by AIG under the CDSs, and (iv) the CPs were
    entitled to par value payments pursuant to the CDS
    contracts.\735\ Although the FRBNY apparently asked the CPs to
    accept a discounted payment for the settlement of the CDSs,
    their efforts ultimately proved unsuccessful.
    ---------------------------------------------------------------------------
        \735\ Office of the Special Inspector General for the Troubled
    Asset Relief Program, Factors Affecting Efforts to Limit Payments to
    AIG Counterparties, at 15 (Nov. 17, 2009) (online at www.sigtarp.gov/
    reports/audit/2009/Factors_Affecting_Efforts_to_Limit_
    Payments_to_AIG_Counterparties.pdf).
    ---------------------------------------------------------------------------
        These justifications proffered by the CPs, and accepted by
    the FRBNY, are not compelling. If the CPs believed that the
    United States government would not permit AIG to fail, then why
    did the FRBNY insist on terminating the CDSs? If the CPs were
    confident that AIG--or the FRBNY in its absence--would continue
    to post collateral if the fair market value of the CDOs
    declined or that the CDOs could be sold for their then market
    value if AIG collapsed, then why not let the CPs assume that
    risk? If the CPs believed that their third-party hedges against
    an AIG default would be honored in full, then (again) why not
    let the CPs assume that risk? Although the SIGTARP Report notes
    that then-FRBNY President Geithner denies that the payments by
    the FRBNY constituted a ``backdoor bailout'' of the CPs,\736\
    without any other explanation, it is difficult to conclude that
    the FRBNY insisted that AIG terminate the CDSs other than as a
    mechanism to provide a direct--yet not particularly
    transparent--government-sponsored subsidy to the CPs.\737\
    ---------------------------------------------------------------------------
        \736\ Office of the Special Inspector General for the Troubled
    Asset Relief Program, Factors Affecting Efforts to Limit Payments to
    AIG Counterparties, at 30 (Nov. 17, 2009) (online at www.sigtarp.gov/
    reports/audit/2009/Factors_Affecting_Efforts_to_Limit_Payments_to_
    AIG_Counterparties.pdf).
        \737\ Is it likely that the market value of the referenced CDOs
    would have dropped from $27.1 billion to zero and necessitated that AIG
    post additional collateral of $27.1 billion? By terminating the CDS
    contracts at par, the FRBNY effectively assumed that the market value
    of the CDOs would drop to zero within the very near term.
    ---------------------------------------------------------------------------
        Even if the FRBNY did not intend for the termination of the
    CDSs to serve as a government-sponsored subsidy of the CPs, why
    did the FRBNY fail to negotiate material discounts with each
    CP? Although the CPs may have believed that (i) the United
    States government would not let AIG fail, (ii) AIG--or the
    FRBNY--would continue to post collateral under the CDS
    contracts or that the CDOs could be sold for their then market
    value if AIG collapsed, and (iii) their third-party hedges
    would be honored in full, such assumptions were by no means
    free from doubt. All doubt was resolved, however, in favor of
    the CPs upon their receipt of cash payments from the FRBNY for
    the full par value of the CDOs. It seems that the negation of
    these risks should have merited the termination of the CDS
    contracts at a material discount to par value.
        In addition, other justifications exist for discounting the
    payments remitted by the FRBNY to the CPs. Prior to the
    termination of the CDSs, the CPs held cash collateral of $35
    billion. Yet, after the termination of the CDSs, the CPs held
    actual cash in the same amount. The transformation of cash
    collateral into actual cash must have been of some benefit to
    the CPs.\738\ Further, prior to the termination of the CDSs,
    the CPs held CDOs with a (falling) market value of $27.1
    billion, but after the termination of the CDSs, the CPs held
    actual cash in the same amount.\739\ In effect, the FRBNY
    permitted--if not directly encouraged--the CPs to convert
    illiquid cash collateral and illiquid CDOs into $62.1 billion
    of actual cash. Trading cash collateral and CDOs with a
    problematic market value for cash during a worldwide liquidity
    crunch must have been of substantial benefit to the CPs. Why
    was the FRBNY unable to terminate the CDSs at a material
    discount to par value? Why did the FRBNY not insist on these
    discounts? Again, the inescapable conclusion, without other
    facts, seems to be that this was a direct government-sponsored
    subsidy to the CPs.
    ---------------------------------------------------------------------------
        \738\ This assumes that posted collateral under these transactions
    was encumbered by contractual and legal restrictions.
        \739\ At the time the FRBNY financed the termination of the AIG
    CDSs, the CDO market was illiquid--if not frozen--and it is doubtful
    that lenders would have accepted CDOs as collateral without the
    imposition of substantial discounts to their then significantly
    depressed market values.
    ---------------------------------------------------------------------------
        It is unlikely that the FRBNY (or the United States
    government) has a basis to seek to unwind the termination of
    the CDSs or compel the CPs to promptly remit a suitable
    discount to the FRBNY. It appears that the CPs--including
    several TARP recipients--received another taxpayer subsidy for
    which they hold no reimbursement obligation. Without this
    substantial subsidy, it is possible that at least some of the
    CPs would not have been permitted by their regulators to exit
    the TARP program on an expedited basis. We recommend that the
    Panel investigate this matter in its upcoming report on AIG.
    Without a better explanation of a straightforward business
    purpose for these transactions, the taxpayers nevertheless may
    be best served by having Treasury seek recission from the CPs,
    reversing cancellation of the CDS contracts and requiring the
    CPs to purchase the underlying CDOs at their $62.1 billion par
    value.
    4. Exit Strategy from HAMP and Other Foreclosure Mitigation Programs
        The TARP-funded HAMP program carries a 100 percent subsidy
    rate according to the General Accounting Office.\740\ This
    means that the United States government will recover none of
    the $50 billion of taxpayer sourced TARP funds invested in the
    HAMP foreclosure mitigation program.\741\ The projected
    shortfall will become more burdensome to the taxpayers as
    Treasury contemplates expanding HAMP or introducing additional
    programs targeted at modifying or refinancing distressed home
    mortgage loans. Since Treasury is charged with protecting the
    interests of the taxpayers who funded HAMP and the other TARP
    programs, we recommend that Treasury's foreclosure mitigation
    efforts be structured so as to incorporate an effective exit
    strategy by allowing Treasury to participate in any subsequent
    appreciation in the home equity of any mortgagor whose loan is
    modified under HAMP or any other taxpayer subsidized
    program.\742\ In order to encourage the participation of
    mortgage lenders in Treasury's foreclosure mitigation efforts,
    such lenders should also be granted the right--subordinate to
    the right granted Treasury--to participate in any subsequent
    equity appreciation. The incorporation of an equity
    participation right may be achieved by the filing of a one-page
    document in the local real estate property records when the
    applicable home mortgage loan is modified. The mechanics of
    such a feature may be illustrated by the following example of a
    typical home mortgage loan modification.
    ---------------------------------------------------------------------------
        \740\ Government Accountability Office, Financial Audit: Office of
    Financial Stability (Troubled Asset Relief Program) Fiscal Year 2009
    Financial Statements (Dec. 2009) (online at www.gao.gov/new.items/
    d10301.pdf).
        \741\ Congressional Budget Office, The Troubled Asset Relief
    Program: Report on Transactions Through June 17, 2009 (June 2009)
    (online at www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf).
        \742\ Congressional Oversight Panel, Taking Stock: What Has the
    Troubled Asset Relief Program Achieved?, Additional views of former
    panelist Congressman Jeb Hensarling (Dec. 9, 2009) (online at
    cop.senate.gov/documents/cop-120909-report-hensarling.pdf).

              Assume a homeowner borrows $200,000 and purchases a
            residence in the same amount.\743\ The home
            subsequently declines in value to $175,000 and the
            homeowner and the mortgage lender agree to restructure
            the loan under a TARP-sponsored foreclosure mitigation
            program pursuant to which the outstanding principal
            balance of the loan is reduced to $175,000 and Treasury
            advances $10,000 in support of the restructure.
            Immediately after the modification the mortgage lender
            has suffered a $25,000 \744\ economic loss and Treasury
            has advanced $10,000 of TARP funds. If the homeowner
            subsequently sells the residence for $225,000, the
            $50,000 of realized equity proceeds \745\ will be
            allocated in accordance with the following waterfall--
            the first $10,000 \746\ is remitted to reimburse
            Treasury for the TARP funds advanced under the
            foreclosure mitigation program; the next $25,000 \747\
            is remitted to the mortgage lender to cover its $25,000
            economic loss; and the balance of $15,000 is paid to
            the homeowner.
    ---------------------------------------------------------------------------
        \743\ These facts illustrate the zero ($0.00) down-payment
    financings that were more common a few years ago.
        \744\ The $25,000 loss equals the $200,000 principal balance of the
    original loan, less the $175,000 principal balance of the modified
    loan. The example does not consider the consequences of modifying the
    interest rate on the loan.
        \745\ The $50,000 of realized equity proceeds equals the $225,000
    sales price of the residence, less the $175,000 outstanding balance of
    the modified loan. The example makes certain simplifying assumptions
    such as the absence of transaction and closing fees and expenses.
        \746\ In order to more appropriately protect the taxpayers, the
    $10,000 advanced under the TARP sponsored foreclosure mitigation
    program should accrue interest at an objective and transparent rate of
    interest. For example, if the 30-year fixed rate of interest on
    mortgage loans equals five-percent when the mortgage loan is modified,
    the $10,000 advance should accrue interest at such a rate and Treasury
    should be reimbursed the aggregate accrued amount upon realization of
    the equity proceeds. If at such time $2,500 of interest has accrued,
    Treasury should be reimbursed $12,500 ($10,000 originally advanced,
    plus $2,500 of accrued interest) instead of only the $10,000 of TARP
    proceeds originally advanced.
        \747\ The mortgage lender may also argue that its $25,000 loss
    should accrue interest in the same manner as provided Treasury. In such
    event, the mortgage lender would be entitled to recover $25,000, plus
    accrued interest upon the realization of sufficient equity proceeds.

        Prior to the repayment of all funds advanced by Treasury
    and the economic loss suffered by the mortgage lender the
    homeowner should not be permitted to borrow against any
    appreciation in the net equity value of the mortgaged property
    unless the proceeds are applied in accordance with the
    waterfall noted above. That is, instead of selling the
    residence for $225,000 as assumed in the foregoing example, the
    homeowner should be permitted to borrow against any net equity
    in the residence, provided $10,000 is remitted to Treasury and
    $25,000 is paid to the mortgage holder prior to the homeowner
    retaining any such proceeds.\748\ Such flexibility allows the
    homeowner to cash out the interests of Treasury and the
    mortgage lender without selling the residence securing the
    mortgage loan. The modified loan documents should also permit
    the homeowner to repay Treasury and the mortgage lender from
    other sources such as personal savings or the disposition of
    other assets.\749\
    ---------------------------------------------------------------------------
        \748\ Prudent underwriting standards should apply to all such home
    equity loans.
        \749\ Treasury may wish to structure its foreclosure mitigation
    efforts so as to encourage the early repayment of TARP funds by
    homeowners. Treasury, for example, could agree to a ten-percent
    discount or waive the accrual of interest on the TARP funds advanced if
    a homeowner repays such funds in full within three years following the
    restructuring. Any such incentives should appear reasonable to the
    taxpayers and should not negate the intent of the equity participation
    right. Mortgage lenders may also agree to similar incentives.
    ---------------------------------------------------------------------------
        We also recommend that to the extent permitted by
    applicable law, Treasury should structure all mortgage loan
    modifications and refinancings under HAMP and any other
    foreclosure mitigation programs as recourse obligations to the
    homeowners. If the loans are structured as non-recourse
    obligations, under state law or otherwise, the homeowners may
    have a diminished incentive to repay Treasury the funds
    advanced under TARP.\750\
    ---------------------------------------------------------------------------
        \750\ Roger Lowenstein, Walk Away From Your Home, New York Times
    (Jan. 7, 2009) (online at www.nytimes.com/2010/01/10/magazine/10FOB-
    wwln-t.html?hp). The article implies that a recourse structure is of
    little benefit if the homeowner is otherwise judgment proof.
    ---------------------------------------------------------------------------
        In our view, the incorporation of these specifically
    targeted modifications into each TARP funded foreclosure
    mitigation program will enhance the possibility that Treasury
    will exit the programs at a reduced cost to the taxpayers.

    5. Implicit Guarantees

        The January report analyzes the difficulties that may arise
    when the United States government directly or indirectly
    undertakes to prevent certain systemically significant
    institutions from failing. Although the government does not
    generally guarantee the assets and obligations of private
    entities, its actions and policies may nevertheless send a
    clear message to the market that some institutions are simply
    too big, or too interconnected, to fail. Once the government
    adopts such a policy it is difficult to know how and where to
    draw the line. With little public debate, automobile
    manufacturers were recently transformed into financial
    institutions so they could be bailed out with TARP funds and an
    array of arguably non-systemically significant institutions--
    such as GMAC \751\--received many billions of dollars of
    taxpayer funded subsidies. In its haste to restructure favored
    institutions, the government may assume the role of king
    maker--as was surely the case in the Chrysler and GM
    bankruptcies--and dictate a reorganization structure that
    arguably contravenes years of well-established commercial and
    corporate law precedent. The unintended consequences of these
    actions linger in the financial markets and legal community
    long after the offending transactions have closed and
    adversely--yet subtly--affect subsequent transactions that
    carry any inherent risk of future governmental intervention.
    The uninitiated may question why two seemingly identical
    business transactions merit disparate risk-adjusted rates of
    return or why some transactions appear over-collateralized or
    inexplicably complicated. The costs of mitigating political
    risk in private sector business transactions are seldom
    quantified or even discussed outside the cadre of
    businesspersons and their advisors who structure, negotiate and
    close such transactions, yet such costs certainly exist and
    must be satisfied.
    ---------------------------------------------------------------------------
        \751\ Although Treasury indicates that GMAC was (again) saved so as
    to support its auto financing business, it also appears that
    substantial GMAC losses stem from speculation in the MBS market. It is
    unclear why GMAC--a putative auto finance company--chose to speculate
    in the MBS market. We recommend that the Panel investigate GMAC and the
    inherent ongoing subsidies that its taxpayer-supported operations
    afford to Chrysler and GM in contrast to their competitors.
    ---------------------------------------------------------------------------
        The resolution of the fundamental public policy issues
    arising from implicit guarantee and political risk should
    remain with Congress.
               SECTION THREE: CORRESPONDENCE WITH TREASURY UPDATE

        Secretary of the Treasury, Timothy Geithner, sent a letter
    to Chair Elizabeth Warren on December 10, 2009 \752\ in
    response to a series of questions presented by the Panel
    regarding the Supervisory Capital Assessment Program (the
    ``stress tests'').
    ---------------------------------------------------------------------------
        \752\ See Appendix I of this report, infra.
    ---------------------------------------------------------------------------
        On behalf of the Panel, Chair Elizabeth Warren sent a
    letter on December 24, 2009 \753\ to Secretary of the Treasury,
    Timothy Geithner, requesting information with respect to the
    Emergency Economic Stabilization Act of 2008 provisions
    governing executive compensation at TARP-recipient financial
    institutions and regarding the authority of the Special Master
    for TARP Executive Compensation. The Panel requested a written
    response from Treasury by January 13, 2010. The Panel has not
    yet received a response from Secretary Geithner.
    ---------------------------------------------------------------------------
        \753\ See Appendix II of this report, infra.
    ---------------------------------------------------------------------------
        On behalf of the Panel, Chair Elizabeth Warren sent a
    letter on January 11, 2010 \754\ to Secretary of the Treasury
    Timothy Geithner, to follow-up on a letter sent on November 25,
    2009,\755\ requesting information with respect to Treasury's
    assistance to CIT Group, Inc. As of the publication of this
    report, the Panel has not received a response from Secretary
    Geithner.
    ---------------------------------------------------------------------------
        \754\ See Appendix III of this report,  infra.
        \755\ See Appendix IV of the Panel's December oversight report.
    Congressional Oversight Panel, December Oversight Report: Taking Stock:
    What Has the Troubled Asset Relief Program Achieved? (Dec. 9, 2009)
    (online at cop.senate.gov/documents/cop-120909-report.pdf).
                  SECTION FOUR: TARP UPDATES SINCE LAST REPORT

               A. Restructuring of Treasury's Investment in GMAC

        Treasury injected an additional $3.8 billion of capital
    into GMAC on December 30, 2009. The $3.8 billion is divided
    into a $2.54 billion purchase of Trust Preferred Securities
    (TruPs), $127 million in warrants to purchase TruPs exercised
    on December 30, a $1.25 billion purchase of Mandatory
    Convertible Preferred Stock (MCP), and $63 million in warrants
    to purchase MCP exercised on December 30.
        In addition, Treasury converted $3 billion of the $7.5
    billion in MCP it purchased in May 2009 into common equity;
    Treasury now owns 56 percent of GMAC's common stock, up from 35
    percent prior to this transaction. As a result, Treasury will
    appoint four members of GMAC's board of directors, up from two
    before the restructuring. The restructuring also converted
    Treasury's preferred stock and warrants, from a $5 billion
    purchase in December 2008, into MCP. Treasury exercised
    warrants it held following both transactions prior to the
    conversions, totaling $375 million and $250 million,
    respectively.
        Treasury made the additional purchases and restructured the
    investment in order to help GMAC satisfy its additional capital
    requirements under the Supervisory Capital Assistance Program
    (SCAP) following the May 2009 stress tests. Treasury's
    additional commitment came in under the $5.6 billion Treasury
    previously estimated GMAC would require under SCAP.
        For a more complete discussion of the restructuring of
    Treasury's GMAC investment, please see Section D.8 of this
    report.

                         B. CPP Monthly Lending Report

        Treasury releases a monthly lending report showing loans
    outstanding at the top 22 CPP recipient banks. The most recent
    report, issued on December 14, 2009, includes data through the
    end of October 2009. Treasury reported that the overall
    outstanding loan balance at the top CPP recipients declined by
    one percent between the end of September 2009 and the end of
    October 2009.

                               C. TARP Repayments

        Since the Panel's most recent oversight report, additional
    banks have repaid their TARP investments under CPP. A total of
    58 banks have repaid their preferred stock TARP investments
    provided under the CPP to date. Treasury has also liquidated
    the warrants it holds in 40 of these 58 banks.
        Most notably, Bank of America and Wells Fargo & Company
    both repaid their full $25 billion CPP investments. In
    addition, both Bank of America and Citigroup repaid all $20
    billion Treasury invested in both institutions through the TIP.
    Finally, General Motors repaid the first $1 billion of a $6.7-
    billion debt obligation to Treasury remaining after GM's
    bankruptcy proceedings. Similar quarterly payments will
    continue until the debt is repaid.
        During November 2009, Treasury received $1.87 billion in
    dividends and $13.5 million in interest from its investments.

                     D. Asset Guarantee Program Termination

        On December 23, 2009, Treasury, the Federal Reserve, the
    Federal Deposit Insurance Corporation, and Citigroup terminated
    a loss-sharing agreement on $301 billion of ring-fenced
    Citigroup assets reached under Treasury's Asset Guarantee
    Program (AGP) in January 2009 and expected to run for 10 years.
    As a result of the early termination, Treasury cancelled $1.8
    billion in Trust Preferred Securities, leaving Treasury with a
    little over $2.2 billion in Trust Preferred Securities and a
    warrant for 66 million shares of Citigroup common stock in
    exchange for the guarantee. This transaction was the only one
    ever consummated under the AGP, and Treasury is terminating the
    program.

                      E. Public-Private Investment Program

        On December 18, 2009, the last of the nine pre-qualified
    PPIP fund managers, Oaktree Capital Management, L.P., closed a
    PPIF transaction. As a result, Treasury has made available to
    fund managers its full complement of $30 billion financing,
    representing $10 billion in equity capital and $20 billion in
    secured debt financing.
        As of December 22, 2009, Treasury reported that PPIP
    transactions totaling $24 billion in purchasing power had
    closed, representing $6 billion in private equity capital, $6
    billion in Treasury equity capital, and $12 billion in secured
    debt financing.
        On January 4, 2010, Treasury entered into a wind-up and
    liquidation agreement with TCW Asset Management, one of the
    nine pre-qualified PPIP fund managers. The agreement will
    unwind a Treasury investment of $356.3 million, with a portion
    of the losses backstopped by TCW.

              F. Term Asset-Backed Securities Loan Facility (TALF)

        At the December 14, 2009 facility, investors requested $1.3
    billion in loans for legacy CMBS. Investors did not request any
    loans for new CMBS. By way of comparison, investors requested
    $1.4 billion in loans for legacy CMBS at the November facility
    and $2.1 billion at the October facility. Investors requested
    $72.2 million in loans for new CMBS at the November facility,
    the only loans requested for new CMBS during TALF's operation.
        At the January 7, 2010 facility, investors requested $1.1
    billion in loans to support issuance of ABS collateralized by
    loans in the credit card, floorplan, and small business
    sectors. No loans were requested in the auto, equipment,
    premium financing, servicing advances, and student loan
    sectors. By way of comparison, at the December 3, 2009
    facility, investors requested $3 billion in loans
    collateralized by the issuance of ABS in the credit card,
    equipment, floorplan, small business, servicing advances, and
    student loan sectors; investors did not request any loans in
    the auto or premium financing sectors.

                              G. Warrant Auctions

        Treasury previously announced that it would sell its
    warrant positions in JPMorgan Chase & Co. and TCF Financial
    Corporation through a modified Dutch auction process. The
    auction of JPMorgan Chase warrants closed on December 10, 2009,
    with proceeds to Treasury of $950.3 million. The auction of TCF
    Financial warrants closed on December 15, 2009, with proceeds
    to Treasury of $9.6 million.

                                   H. Metrics

        Each month, the Panel's report highlights a number of
    metrics that the Panel and others, including Treasury, the
    Government Accountability Office (GAO), Special Inspector
    General for the Troubled Asset Relief Program (SIGTARP), and
    the Financial Stability Oversight Board, consider useful in
    assessing the effectiveness of the Administration's efforts to
    restore financial stability and accomplish the goals of EESA.
    This section discusses changes that have occurred in several
    indicators since the release of the Panel's December report.
         Interest Rate Spreads. Interest rate spreads have
    continued to tighten since the Panel's December report, showing
    further signs of financial stability. Interest rates on
    overnight commercial paper have returned to near pre-crisis
    levels. The interest rate spread for AA asset-backed commercial
    paper, which is considered mid-investment grade, has decreased
    by nearly 8 percent since the Panel's December report and is at
    its lowest level since July 2007. Interest rate spreads on
    overnight A2/P2 commercial paper, considered to be lower
    quality, have decreased over 95 percent since the enactment of
    EESA.

                                            FIGURE 14: INTEREST RATE SPREADS
    ----------------------------------------------------------------------------------------------------------------
                                                                                              Percent Change  Since
                                 Indicator                                Current Spread     Last Report  (as of 11/
                                                                         (as of 12/31/09)            30/09)
    ----------------------------------------------------------------------------------------------------------------
    3 month LIBOR-OIS spread \756\....................................                0.09                     -33
    1 month LIBOR-OIS spread \757\....................................                0.10                     -16
    TED spread \758\ (in basis points)................................               19                         -5
    Conventional mortgage rate spread \759\...........................                1.29                     -12.8
    Corporate AAA bond spread \760\...................................                1.56                     -11.9
    Corporate BAA bond spread \761\...................................                2.66                      -9.5
    Overnight AA asset-backed commercial paper interest rate spread                   0.17                      -7.6
     \762\............................................................
    Overnight A2/P2 nonfinancial commercial paper interest rate spread                0.13                      52.3
     \763\............................................................
    ----------------------------------------------------------------------------------------------------------------
    \756\ 3 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS3:IND) (accessed Jan.
      4, 2010) (hereinafter ``3 Mo LIBOR-OIS Spread'').
    \757\ 1 Mo LIBOR-OIS Spread, Bloomberg (online at www.bloomberg.com/apps/quote?ticker=.LOIS1:IND) (accessed Jan.
      4, 2010).
    \758\ TED Spread, SNL Financial.
    \759\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
      Interest Rates: Historical Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
      www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/H15_MORTG_NA.txt) (accessed Jan. 4, 2010); Board of
      Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected Interest Rates:
      Historical Data (Instrument: U.S. Government Securities/Treasury Constant Maturities/Nominal 10-Year,
      Frequency: Weekly) (online at www.federalreserve.gov/releases/h15/data/Weekly_Friday_H15_TCMNOM_Y10.txt)
      (hereinafter ``Federal Reserve Statistical Release H.15'') (accessed Jan. 4, 2010).
    \760\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
      Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody's Seasoned AAA, Frequency: Weekly) (online
      at www.federalreserve.gov/releases/h15/data/Weekly_Friday_H15_AAA_NA.txt) (accessed Jan. 4, 2010); Federal
      Reserve Statistical Release H.15, supra note 759 (accessed Jan. 4, 2010).
    \761\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.15: Selected
      Interest Rates: Historical Data (Instrument: Corporate Bonds/Moody's Seasoned BAA, Frequency: Weekly) (online
      at www.federalreserve.gov/releases/h15/data/Weekly_Friday_/H15_BAA_NA.txt) (accessed Jan. 4, 2010); Federal
      Reserve Statistical Release H.15, supra note 759 (accessed Jan. 4, 2010).
    \762\ Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release: Commercial Paper
      Rates and Outstandings: Data Download Program (Instrument: AA Asset-Backed Discount Rate, Frequency: Daily)
      (online at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (hereinafter ``Federal Reserve Statistical
      Release on Commercial Paper'') (accessed Jan. 4, 2010); Board of Governors of the Federal Reserve System,
      Federal Reserve Statistical Release: Commercial Paper Rates and Outstandings: Data Download Program
      (Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
      Choose.aspx?rel=CP) (accessed Jan. 4, 2010). In order to provide a more complete comparison, this metric
      utilizes a five-day average of the interest rate spread for the last five days of the month.
    \763\ Federal Reserve Statistical Release on Commercial Paper, supra note 762. In order to provide a more
      complete comparison, this metric utilizes a five-day average of the interest rate spread for the last five
      days of the month.

           LIBOR-OIS Spread. The LIBOR-OIS spread provides
    another example of how credit conditions have improved. This
    spread measures the difference between LIBOR, which shows
    quarterly borrowing costs for banks, and the Overnight Indexed
    Swaps rate (OIS), which measures the cost of extremely short-
    term borrowing by financial institutions. As the spread
    increases, market participants have greater fears about whether
    counterparties will be able to deliver on their obligations.
    The lower spread means that the banking sector now has a
    significantly lower cost of short-term capital than it did at
    the height of the crisis.\764\
    ---------------------------------------------------------------------------
        \764\ Federal Reserve Bank of St. Louis, What the Libor-OIS Spread
    Says (May 11, 2009) (online at research.stlouisfed.org/publications/es/
    09/ES0924.pdf).
    ---------------------------------------------------------------------------

        FIGURE 15: 3 MONTH LIBOR-OIS SPREAD (AS OF DECEMBER 2009) \765\

    ---------------------------------------------------------------------------
        \765\ See 3 Mo LIBOR-OIS Spread, supra note 756.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

           TED Spread. The TED spread, which is the
    difference between LIBOR and short-term Treasury bill interest
    rates, is another indicator of perceived credit risk. After
    peaking in late 2008, the TED spread has fallen to pre-crisis
    levels, as Figure 16 illustrates. The TED spread has continued
    to tighten since the Panel's December report, declining 5
    percent since November 30, 2009.\766\
    ---------------------------------------------------------------------------
        \766\ SNL Financial, Historical Dividend Yield Values, 3 Month
    Libor (online at www1.snl.com/InteractiveX/history.aspx?
    RateList=1&Tabular=True&GraphType= 2&Frequency=0&TimePeriod2=
    11&BeginDate=12%2F29%2F06&EndDate =11%2F4%2F2009&SelectedYield2
    =YID%3A63&ctl00%24ctl09%24IndexPreference= default&ComparisonIndex2
    =0&ComparisonYield2=1&CustomIndex= 0&ComparisonTicker2=&Action=Apply)
    (accessed Nov. 5, 2009) (hereinafter ``Historical Dividend Yield
    Values, 3 Month Libor''); SNL Financial, Historical Dividend Yield
    Values, 3 Month Treasury Bill (online at www1.snl.com/InteractiveX/
    history.aspx?RateList
    =1&Tabular=True&GraphType=2&Frequency=0&TimePeriod2=
    11&BeginDate=12%2F29%2F06&EndDate =11%2F4%2F2009&Selected Yield2
    =YID%3A63&ctl00%24ctl09%24IndexPreference=default&ComparisonIndex2
    =0&ComparisonYield2=1&CustomIndex=0&ComparisonTicker2=&Action=Apply)
    (accessed Nov. 5, 2009).
    ---------------------------------------------------------------------------

               FIGURE 16: TED SPREAD SINCE OCTOBER 3, 2008 \767\

    ---------------------------------------------------------------------------
        \767\ Historical Dividend Yield Values, 3 Month Libor, supra note
    766; Historical Dividend Yield Values, 3 Month Libor, supra note 766.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

           Commercial Paper Outstanding. Commercial paper
    outstanding, a rough measure of short-term business debt, is an
    indicator of the availability of credit for enterprises. The
    amount of commercial paper outstanding has decreased across the
    three categories the Panel measures since the December 2009
    report. Financial commercial paper outstanding has decreased by
    over 9 percent since the Panel's last report while nonfinancial
    commercial paper outstanding fell by over 13.5 percent.\768\
    Commercial paper outstanding has continued to decrease since
    the enactment of EESA. Asset-backed commercial paper
    outstanding has declined nearly 32 percent and nonfinancial
    commercial paper outstanding has decreased by over 49 percent
    since October 2008.\769\
    ---------------------------------------------------------------------------
        \768\ Federal Reserve Statistical Release on Commercial Paper,
    supra note 762.
        \769\ Federal Reserve Statistical Release on Commercial Paper,
    supra note 762.

                                         FIGURE 17: COMMERCIAL PAPER OUTSTANDING
    ----------------------------------------------------------------------------------------------------------------
                                                                         Current Level  (as
                                                                            of 12/31/09)      Percent Change  Since
                                 Indicator                                  (billions of     Last Report  (11/25/09)
                                                                              dollars)
    ----------------------------------------------------------------------------------------------------------------
    Asset-backed commercial paper outstanding (seasonally adjusted)                  $485.8                    -2.35
     \770\.............................................................
    Financial commercial paper outstanding (seasonally adjusted) \771\.               578                      -9.13
    Nonfinancial commercial paper outstanding (seasonally adjusted)                   103.1                  -13.57
     \772\.............................................................
    ----------------------------------------------------------------------------------------------------------------
    \770\ Federal Reserve Statistical Release on Commercial Paper, supra note 762.
    \771\ Federal Reserve Statistical Release on Commercial Paper, supra note 762.
    \772\ Federal Reserve Statistical Release on Commercial Paper, supra note 762.

           Lending by the Largest TARP-recipient Banks.
    Treasury's Monthly Lending and Intermediation Snapshot tracks
    loan originations and average loan balances for the 22 largest
    recipients of CPP funds across a variety of categories, ranging
    from mortgage loans to commercial real estate to credit card
    lines. The data below exclude lending by two large CPP-
    recipient banks, PNC Bank and Wells Fargo, because significant
    acquisitions by those banks since October 2008 make comparisons
    difficult.\773\
    ---------------------------------------------------------------------------
        \773\ PNC Financial and Wells Fargo purchased large banks at the
    end of 2008. PNC Financial purchased National City on October 24, 2008
    and Wells Fargo completed its merger with Wachovia Corporation on
    January 1, 2009. The assets of National City and Wachovia are included
    as part of PNC and Wells Fargo, respectively, in Treasury's January
    lending report but are not differentiated from the existing assets or
    the acquiring banks. As such, there were dramatic increases in the
    total average loan balances of PNC and Wells Fargo in January 2009. For
    example, PNC's outstanding total average loan balance increased from
    $75.3 billion in December 2008 to $177.7 billion in January 2009. The
    same effect can be seen in Wells Fargo's total average loan balance of
    $407.2 billion in December 2008 which increased to $813.8 billion in
    January 2009. The Panel excludes PNC and Wells Fargo in order to have a
    more consistent basis of comparison across all institutions and lending
    categories.
    ---------------------------------------------------------------------------
    In October, these 20 institutions originated over $187 billion
    in loans, a decrease of nearly one percent compared to
    September 2009.\774\
    ---------------------------------------------------------------------------
        \774\ U.S. Department of the Treasury, Treasury Department Monthly
    Lending and Intermediation Snapshot: Summary Analysis for October 2009
    (Jan. 4, 2010) (online at www.financialstability.gov/docs/surveys/
    Snapshot_Data_October_2009.xls) (hereinafter ``Treasury Snapshot for
    October'').

               FIGURE 18: LENDING BY THE LARGEST TARP-RECIPIENT BANKS (WITHOUT PNC AND WELLS FARGO) \775\
    ----------------------------------------------------------------------------------------------------------------
                                                            Most Recent Data
                                                             (October 2009)     Percent Change      Percent Change
                          Indicator                           (millions of     Since  September     Since  October
                                                                dollars)             2009                2008
    ----------------------------------------------------------------------------------------------------------------
    Total loan originations..............................           $187,033               -0.67               -14.3
    Total mortgage originations..........................             54,645                0.84                23.4
    Small business originations..........................              5,394                8              \776\ 5.6
    Mortgage refinancing.................................             30,427               -0.15                62.1
    HELOC originations (new lines & line increases)......              2,226               -1.98               -53.2
    C&I renewal of existing accounts.....................             47,677              -12.6                -17
    C&I new commitments..................................             41,824               19.7                -29.1
        Total average loan balances......................         $3,398,679               -0.89                -0.7
    ----------------------------------------------------------------------------------------------------------------
    \775\ Treasury Snapshot for October, supra note 774.
    \776\ Treasury only began reporting data regarding small business originations in its April Lending Survey. U.S.
      Department of the Treasury, Treasury Department Monthly Lending and Intermediation Snapshot (hereinafter
      ``Treasury Snapshot for April'').

         Housing Indicators. Foreclosure filings decreased
    by over seven percent from October to November, and are nearly
    10 percent above the level of October 2008. Housing prices, as
    illustrated by both the S&P/Case-Shiller Composite 20 Index and
    the FHFA House Price Index, increased slightly in October.

                                              FIGURE 19: HOUSING INDICATORS
    ----------------------------------------------------------------------------------------------------------------
                                                                                Percent Change
                                                              Most Recent          From Data        Percent  Change
                          Indicator                          Monthly Data      Available at Time    Since  October
                                                                                of Last Report           2008
    ----------------------------------------------------------------------------------------------------------------
    Monthly foreclosure filings \777\...................          306,627                  -7.7                 9.7
    Housing prices--S&P/Case-Shiller Composite 20 Index               145.4                 0.37               -7.3
     \778\..............................................
    FHFA Housing Price Index \779\......................              199.41                0.64               -1.91
    ----------------------------------------------------------------------------------------------------------------
    \777\ RealtyTrac, Foreclosure Activity Press Releases (online at www.realtytrac.com//ContentManagement/
      PressRelease.aspx) (accessed Jan. 4, 2010) (hereinafter ``RealtyTrac Foreclosure Activity Data''). The most
      recent data available is for October 2009.
    \778\ Standard & Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Seasonally Adjusted Composite 20
      Index) (online at www.standardandpoors.com/prot/servlet/BlobServer?blobheadername3=MDT-
      Type&blobcol=urldata&blobtable=MungoBlobs&
      blobheadervalue2=inline%3B+filename%3DSA_CSHomePrice_History_122925.xls&blobheadername2=Content-Disposition
      &blobheadervalue1=application%2Fexcel&blobkey=id&blobheadername1=content-
      type&blobwhere=1243629218624&blobheadervalue3=UTF-8) (hereinafter ``S&P/Case-Shiller Home Price Indices'')
      (accessed Jan. 4, 2010). The most recent data available is for October 2009.
    \779\ Federal Housing Finance Agency, U.S. and Census Division Monthly Purchase Only Index (Instrument: USA,
      Seasonally Adjusted) (online at www.fhfa.gov/webfiles/15321/MonthlyIndex_Jan1991_to_Latest.xls) (accessed Jan.
      4, 2010). The most recent data available is for October 2009.

    FIGURE 20: FORECLOSURE FILINGS AS COMPARED TO THE CASE-SHILLER 20 CITY
                  HOME PRICE INDEX (AS OF OCTOBER 2009) \780\

    ---------------------------------------------------------------------------
        \780\ RealtyTrac Foreclosure Activity Data, supra note 777; S&P/
    Case-Shiller Home Price Indices, supra note 778. The most recent data
    available is for October 2009.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

         Commercial Real Estate. The commercial real estate
    market has continued to deteriorate since the Panel's last
    report. New CRE lending by the top 22 CPP recipients has
    decreased by over 71 percent since the enactment of EESA.
    Respondents to Treasury's survey of the top 22 CPP participants
    reported that demand for C&I and CRE loans was still below
    normal levels due to the lack of new construction.\781\ A
    recent Goldman Sachs report notes that rent growth in this
    market declined at an annualized rate of 8.7 percent in the
    second quarter and estimates that there will be a total of $287
    billion in aggregated losses.
    ---------------------------------------------------------------------------
        \781\ Treasury Snapshot for April, supra note 776. The Goldman
    Sachs Group, Inc., US Commercial Real Estate Take III: Reconstructing
    Estimates for Losses, Timing (Sept. 29, 2009).

         FIGURE 21: COMMERCIAL REAL ESTATE LENDING BY TOP 22 CPP RECIPIENTS (WITHOUT PNC AND WELLS FARGO) \782\
    ----------------------------------------------------------------------------------------------------------------
                                           Current Level  as of 12/                            Percent Change Since
                  Indicator                  31/09)  (millions of     Percent Change Since    EESA  Signed into Law
                                                   dollars)              September 2009             (10/3/08)
    ----------------------------------------------------------------------------------------------------------------
    CRE New Commitments..................                   $2,977                    -4.07                   -71.7
    CRE Renewal of Existing Accounts.....                    9,194                   -11.9                      2.2
    CRE Average Total Loan Balance.......                  370,569                    -1.16                    -1.14
    ----------------------------------------------------------------------------------------------------------------
    \782\ Treasury Snapshot for October, supra note 735.

                              I. Financial Update

        Each month, the Panel summarizes the resources that the
    federal government has committed to economic stabilization. The
    following financial update provides: (1) An updated accounting
    of the TARP, including a tally of dividend income, repayments
    and warrant dispositions that the program has received as of
    November 30, 2009; and (2) an updated accounting of the full
    federal resource commitment as of December 30, 2009.

    1. TARP

                a. Costs: Expenditures and Commitments
        Treasury has committed or is currently committed to spend
    $532.6 billion of TARP funds through an array of programs used
    to purchase preferred shares in financial institutions, offer
    loans to small businesses and automotive companies, and
    leverage Federal Reserve loans for facilities designed to
    restart secondary securitization markets.\783\ Of this total,
    $297 billion is currently outstanding under the $698.7 billion
    limit for TARP expenditures set by EESA, leaving $403.3 billion
    available for fulfillment of anticipated funding levels of
    existing programs and for funding new programs and initiatives.
    The $297 billion includes purchases of preferred and common
    shares, warrants and/or debt obligations under the CPP, AIGIP/
    SSFI Program, PPIP, and AIFP; and a $20 billion loan to TALF
    LLC, the special purpose vehicle (SPV) used to guarantee
    Federal Reserve TALF loans.\784\ Additionally, Treasury has
    allocated $35.5 billion to the Home Affordable Modification
    Program, out of a projected total program level of $50 billion.
    ---------------------------------------------------------------------------
        \783\ EESA, as amended by the Helping Families Save Their Homes Act
    of 2009, limits Treasury to $698.7 billion in purchasing authority
    outstanding at any one time as calculated by the sum of the purchase
    prices of all troubled assets held by Treasury. Pub. L. No. 110-343,
    115(a)-(b); Helping Families Save Their Homes Act of 2009, Pub. L. No.
    111-22, 402(f) (reducing by $1.26 billion the authority for the TARP
    originally set under EESA at $700 billion). For further discussion of
    pending legislation that may affect the total amount of TARP funds
    available, see Section F, infra.
        \784\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
    ---------------------------------------------------------------------------
                b. Income: Dividends, Interest Payments, and CPP Repayments

        As of December 30, 2009, a total of 58 institutions have
    completely repurchased their CPP preferred shares. Of these
    institutions, 37 have repurchased their warrants for common
    shares that Treasury received in conjunction with its preferred
    stock investments; Treasury sold the warrants for common shares
    for three other institutions at auction.\785\ Treasury received
    $50.9 million in repayments from 13 CPP participants during
    December.\786\ The vast majority of this total was repaid by
    two institutions--Bank of America and Wells Fargo--that each
    repaid $25 billion received as part of the CPP.\787\
    Furthermore, Treasury closed its Targeted Investment Program
    (TIP) after Citigroup and Bank of America's program repayments
    of $20 billion each ended any of TIP's outstanding obligations.
    In addition, Treasury receives dividend payments on the
    preferred shares that it holds, usually five percent per annum
    for the first five years and nine percent per annum
    thereafter.\788\ In total, Treasury has received approximately
    $186.5 billion in income from repayments, warrant repurchases,
    dividends, and interest payments deriving from TARP
    investments,\789\ and another $1.2 billion in participation
    fees from its Guarantee Program for Money Market Funds.\790\
    ---------------------------------------------------------------------------
        \785\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
        \786\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
        \787\ TARP Transactions Report for Period Ending December 30, 2009,
    supra note 166.
        \788\ See, e.g., U.S. Department of the Treasury, Securities
    Purchase Agreement: Standard Terms (online at
    www.financialstability.gov/docs/CPP/spa.pdf) (accessed Jan. 4, 2010).
        \789\ See Cumulative Dividends Report as of November 30, 2009,
    supra note 241; TARP Transactions Report for Period Ending December 30,
    2009, supra note 166.
        \790\ U.S. Department of the Treasury, Treasury Announces
    Expiration of Guarantee Program for Money Market Funds (Sept. 18, 2009)
    (online at www.treasury.gov/press/releases/tg293.htm).
    ---------------------------------------------------------------------------
                c. TARP Accounting

                               FIGURE 22: TARP ACCOUNTING (AS OF DECEMBER 30, 2009) \791\
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                     Anticipated                        Total           Funding          Funding
           TARP Initiative             Funding     Actual Funding     Repayments      Outstanding       Available
    ----------------------------------------------------------------------------------------------------------------
    Capital Purchase Program               $218.0          $204.9           $121.9            $83              $13.1
     (CPP) \792\.................
    Targeted Investment Program              40.0            40.0             40                0                0
     (TIP) \793\.................
    AIG Investment Program                   69.8      \794\ 46.9              0               46.9             22.9
     (AIGIP)/Systemically
     Significant Failing
     Institutions Program (SSFI).
    Automobile Industry Financing            81.3            81.3              3.2             78.1              0
     Program (AIFP) \795\........
    Asset Guarantee Program (AGP)             5.0             5.0        \797\ 5.0              0                0
     \796\.......................
    Capital Assistance Program     ..............  ..............  ...............  ...............  ...............
     (CAP) \798\.................
    Term Asset-Backed Securities             20.0            20.0              0               20.0              0
     Lending Facility (TALF).....
    Public-Private Investment                30.0            30.0              0               30.0              0
     Partnership (PPIP)..........
    Supplier Support Program            \799\ 3.5             3.5              0                3.5              0
     (SSP).......................
    Unlocking SBA Lending........            15.0               0            N/A                0               15.0
    Home Affordable Modification             50.0      \800\ 35.5              0               35.5             14.5
     Program (HAMP)..............
    Total Committed..............           532.6           467.1             --              297               65.5
    Total Uncommitted............           166.1             N/A            170.1            N/A        \801\ 336.2
        Total....................          $698.7          $467.1           $170.1           $297       \802\ $401.7
    ----------------------------------------------------------------------------------------------------------------
    \791\ TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
    \792\ As of December 30, 2009, the CPP was closed. This figure reflects funds that were committed but unused.
      This information was provided by Treasury in response to Panel inquiry.
    \793\ Both Bank of America and Citigroup repaid the $20 billion in assistance each institution received under
      the TIP on December 9 and December 23, 2009, respectively. Therefore the Panel accounts for these funds as
      repaid and as uncommitted. U.S. Department of the Treasury, Treasury Receives $45 Billion in Repayments from
      Wells Fargo and Citigroup (Dec. 22, 2009) (online at www.treas.gov/press/releases/20091229716198713.htm)
      (hereinafter ``Treasury Receives $45 Billion from Wells Fargo and Citigroup'').
    \794\ In information provided by Treasury in response to a Panel request, AIG has completely utilized the $40
      billion made available on November 25, 2008 and drawn-down $5.3 billion of the $29.8 billion made available on
      April 17, 2009. This figure also reflects $1.6 billion in compounding of accumulated but unpaid dividends owed
      by AIG to Treasury due to the restructuring of Treasury's investment from cumulative preferred shares to non-
      cumulative shares. TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
    \795\ Treasury indicated that it would most likely not provide additional assistance to companies through the
      AIFP. Government Accountability Office, Auto Industry: Continued Stewardship Needed as Treasury Develops
      Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM, at 28 (Nov. 2009) (GAO-10-151)
      (online at www.gao.gov/new.items/d10151.pdf) (``Although the immediate crisis of helping Chrysler and GM
      maintain solvency has passed for now and Treasury has no plans for further financial assistance to the
      companies, the significant sums of taxpayer dollars that are invested in these companies warrant continued
      oversight''). However, on January 5, 2010, Treasury announced a restructuring of its investment in GMAC, which
      resulted in $3.8 billion in additional funds being provided to the company through the AIFP.
    \796\ Treasury, the Federal Reserve, and the Federal Deposit Insurance Company terminated the asset guarantee
      with Citigroup on December 23, 2009. The agreement was terminated with no losses to Treasury's $5 billion
      second-loss portion of the guarantee. Citigroup did not repay any funds directly, but instead terminated
      Treasury's outstanding exposure on its $5 billion second-loss position. As a result, the $5 billion is now
      accounted for as available. Treasury Receives $45 Billion from Wells Fargo and Citigroup, supra note 793.
    \797\ Although this $5 billion is no longer exposed as part of the AGP and is accounted for as available,
      Treasury did not receive a repayment in the same sense as with other investments. See infra notes 806-807.
      Treasury did receive other income as consideration for the guarantee, which is not a repayment and is
      accounted for in Figure 25. See id.
    \798\ On November 9, 2009, Treasury announced the closing of this program and that only one institution, GMAC,
      was in need of further capital from Treasury. Treasury Announcement Regarding the CAP, supra note 486.
    \799\ On July 8, 2009, Treasury lowered the total commitment amount for the program from $5 billion to $3.5
      billion. This action reduced GM's portion from $3.5 billion to $2.5 billion and Chrysler's portion from $1.5
      billion to $1 billion. TARP Transactions Report for Period Ending December 30, 2009, supra note 166.
    \800\ This figure reflects the total of all the caps set on payments to each mortgage servicer and not the
      disbursed amount of funds for successful modifications. TARP Transactions Report for Period Ending December
      30, 2009, supra note 166.
    \801\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($166.1 billion)
      and the repayments ($170.1 billion).
    \802\ This figure is the sum of the uncommitted funds remaining under the $698.7 billion cap ($166.1 billion)
      and the difference between the total anticipated funding and the net current investment ($297 billion).

                                                              FIGURE 23: TARP REPAYMENTS AND INCOME
                                                                      [Dollars in billions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Warrant
                                                            Repayments  (as  Dividends \803\  Interest \804\    Repurchases   Other Proceeds
                        TARP Initiative                      of  12/30/09)    (as of  11/30/   (as of  11/30/ (as of  12/30/   (as of  12/30/      Total
                                                                                   09)              09)             09)             09)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Total.................................................           $165.1           $11.7            $0.36           $4.03               -         $183.7
    CPP...................................................            121.9             8               0.02            4.03               -          134
    TIP...................................................             40               2.7              N/A            0                  -           42.7
    AIFP..................................................              3.2             0.75            0.33          N/A                  -            4.3
    ASSP..................................................            N/A             N/A               0.01          N/A                  -            0.01
    AGP...................................................        \805\ 0               0.26             N/A            0        \806\ $2.23            2.5
    Bank of America Guarantee.............................              -               -                  -            -         \807\ 0.28             .28
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \803\ See Cumulative Dividends Report as of November 30, 2009, supra note 241.
    \804\ See Cumulative Dividends Report as of November 30, 2009, supra note 241.
    \805\ Although Treasury, the Federal Reserve, the FDIC, and Citigroup have terminated the AGP, and although Treasury's $5 billion second-loss position
      no longer counts against the $698.7 TARP ceiling, Treasury did not receive any repayment income. See infra notes 806-807. Treasury did receive other
      income as consideration for the guarantee, which is not a repayment and is accounted for in Figure 25. See id.
    \806\ As a fee for taking a second-loss position up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP, Treasury
      received $4.03 billion in Citigroup preferred stock and warrants; Treasury exchanged these preferred stocks and warrants for trust preferred
      securities in June 2009. Following the early termination of the guarantee, Treasury cancelled $1.8 billion of the trust preferred securities, leaving
      Treasury with a $2.23 billion investment in Citigroup trust preferred securities in exchange for the guarantee. U.S. Department of the Treasury,
      Troubled Asset Relief Program Transactions Report for Period Ending December 30, 2009 (Jan. 4, 2010) (online at www.financialstability.gov/docs/
      transaction-reports/1-4-10%20Transactions%20Report%20as%20of%2012-30-09.pdf).
    \807\ Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
      agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
      the negotiations. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the FDIC.
      U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
      Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
      %20executed.pdf).

    Rate of Return

        As of December 30, 2009, the average internal rate of
    return for all financial institutions that participated in the
    CPP and fully repaid the U.S. government (including preferred
    shares, dividends, and warrants) is 14.4 percent.\808\ The
    internal rate of return is the annualized effective compounded
    return rate that can be earned on invested capital.
    ---------------------------------------------------------------------------
        \808\ Participating privately-held qualified financial institutions
    provided Treasury with warrants to purchase additional preferred stock,
    which Treasury exercised immediately. TARP Transactions Report for
    Period Ending December 30, 2009, supra note 166. The corresponding
    figure does not reflect the repayment of private institutions'
    preferred stock. The internal rate of return for repayments by these
    institutions is 16.7 percent.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    2. Other Financial Stability Efforts

    Federal Reserve, FDIC, and Other Programs

        In addition to the direct expenditures Treasury has
    undertaken through TARP, the federal government has engaged in
    a much broader program directed at stabilizing the U.S.
    financial system. Many of these initiatives explicitly augment
    funds allocated by Treasury under specific TARP initiatives,
    such as FDIC and Federal Reserve asset guarantees for
    Citigroup, or operate in tandem with Treasury programs, such as
    the interaction between PPIP and TALF. Other programs, like the
    Federal Reserve's extension of credit through its section 13(3)
    facilities and SPVs and the FDIC's Temporary Liquidity
    Guarantee Program, operate independently of TARP.
        Figure 25 below reflects the changing mix of Federal
    Reserve investments. As the liquidity facilities established to
    face the crisis have been wound down, the Federal Reserve has
    expanded its facilities for purchasing mortgage related
    securities. The Federal Reserve has announced that it intends
    to purchase $175 billion of federal agency debt securities and
    $1.25 trillion of agency mortgage-backed-securities.\809\ As of
    January 7, 2010, $160 billion of federal agency (government-
    sponsored enterprise) debt securities and $909 billion of
    agency mortgage-backed-securities have been purchased. The
    Federal Reserve has announced that these purchases will be
    completed by April 2010.\810\
    ---------------------------------------------------------------------------
        \809\ Board of Governors of the Federal Reserve System, Minutes of
    the Federal Open Market Committee, at 10 (Dec. 15-16, 2009) (online at
    www.federalreserve.gov/newsevents/press/
    monetary/fomcminutes20091216.pdf) (hereinafter ``Minutes of the Federal
    Open Market Committee'').
        \810\ RealtyTrac Foreclosure Activity Data supra note 809, at 10
    (``In order to promote a smooth transition in markets, the Committee is
    gradually slowing the pace of these purchases, and it anticipates that
    these transactions will be executed by the end of the first quarter of
    2010''); Board of Governors of the Federal Reserve System, Factors
    Affecting Reserve Balances (Jan. 7, 2010) (online at
    www.federalreserve.gov/Releases/H41/Current/).
    ---------------------------------------------------------------------------

     FIGURE 25: FEDERAL RESERVE AND FDIC FINANCIAL STABILITY EFFORTS \811\

    ---------------------------------------------------------------------------
        \811\ Federal Reserve Liquidity Facilities include: Primary credit,
    Secondary credit, Central Bank Liquidity Swaps, Primary dealer and
    other broker-dealer credit, Asset-Backed Commercial Paper Money Market
    Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial
    Paper Funding Facility LLC, Seasonal credit, Term auction credit, Net
    Portfolio Holdings of TALF LLC. Federal Reserve Mortgage Related
    Facilities Include: Federal agency debt securities and Mortgage-backed
    securities held by the Federal Reserve. Institution Specific Facilities
    include: Credit extended to American International Group, Inc., and the
    net portfolio holdings of Maiden Lanes I, II, and III. All Federal
    Reserve figures reflect the weekly average outstanding under the
    specific programs during the last week of the specified month. Board of
    Governors of the Federal Reserve System, Factors Affecting Reserve
    Balances (H.4.1) (online at www.federalreserve.gov/datadownload/
    Choose.aspx?rel=H41) (accessed Jan. 4, 2010). For related presentations
    of Federal Reserve data, see Board of Governors of the Federal Reserve
    System, Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov.
    2009) (online at www.federalreserve.gov/monetarypolicy/files/
    monthlyclbsreport200911.pdf). The TLGP figure reflects the monthly
    amount of debt outstanding under the program. Federal Deposit Insurance
    Corporation, Monthly Reports on Debt Issuance Under the Temporary
    Liquidity Guarantee Program (Dec. 2008-Nov. 2009) (online at
    www.fdic.gov/regulations/resources/TLGP/reports.html).

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    ---------------------------------------------------------------------------
    3. Total Financial Stability Resources (as of November 30, 2009)

        Beginning in its April report, the Panel broadly classified
    the resources that the federal government has devoted to
    stabilizing the economy through myriad new programs and
    initiatives as outlays, loans, or guarantees. Although the
    Panel calculates the total value of these resources at over $3
    trillion, this would translate into the ultimate ``cost'' of
    the stabilization effort only if: (1) assets do not appreciate;
    (2) no dividends are received, no warrants are exercised, and
    no TARP funds are repaid; (3) all loans default and are written
    off; and (4) all guarantees are exercised and subsequently
    written off.
        With respect to the FDIC and Federal Reserve programs, the
    risk of loss varies significantly across the programs
    considered here, as do the mechanisms providing protection for
    the taxpayer against such risk. As discussed in the Panel's
    November report, the FDIC assesses a premium of up to 100 basis
    points on TLGP debt guarantees.\812\ In contrast, the Federal
    Reserve's liquidity pro- grams are generally available only to
    borrowers with good credit, and the loans are over-
    collateralized and with recourse to other assets of the
    borrower. If the assets securing a Federal Reserve loan realize
    a decline in value greater than the ``haircut,'' the Federal
    Reserve is able to demand more collateral from the borrower.
    Similarly, should a borrower default on a recourse loan, the
    Federal Reserve can turn to the borrower's other assets to make
    the Federal Reserve whole. In this way, the risk to the
    taxpayer on recourse loans only materializes if the borrower
    enters bankruptcy. The only loans currently ``underwater''--
    where the outstanding principal amount exceeds the current
    market value of the collateral--are two of the three non-
    recourse loans to the Maiden Lane SPVs (used to purchase Bear
    Stearns and AIG assets).
    ---------------------------------------------------------------------------
        \812\ COP November Oversight Report, supra note 2, at 36.

                   FIGURE 26: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF NOVEMBER 30, 2009)
                                                  [Dollars in billions]
    ----------------------------------------------------------------------------------------------------------------
                                                         Treasury         Federal
                         Program                          (TARP)          Reserve          FDIC            Total
    ----------------------------------------------------------------------------------------------------------------
    Total...........................................          $698.7        $1,509.9          $678.4          $2,887
        Outlaysi....................................           299.8         1,069.5            69.4         1,438.7
        Loans.......................................            42.7           440.4               0           483.1
        Guaranteesii................................              20               0             609             629
        Uncommitted TARP Funds......................           336.2               0               0           336.2
    AIG.............................................            69.8            68.7               0           138.5
        Outlays.....................................         iii6938               0               0            69.8
        Loans.......................................               0          iv68.7               0            68.7
        Guarantees..................................               0               0               0               0
    Bank of America.................................               0               0               0               0
        Outlays.....................................              v0               0               0               0
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Citigroup.......................................              25               0               0              25
        Outlays.....................................            vi25               0               0              25
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Capital Purchase Program (Other)................            71.1               0               0            71.1
        Outlays.....................................         vii71.1               0               0            71.1
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Capital Assistance Program......................             N/A               0               0         viiiN/A
    TALF............................................              20             180               0             200
        Outlays.....................................               0               0               0               0
        Loans.......................................               0            x180               0             180
        Guarantees..................................            ix20               0               0              20
    PPIP (Loans)xi..................................               0               0               0               0
        Outlays.....................................               0               0               0               0
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    PPIP (Securities)...............................           xii30               0               0              30
        Outlays.....................................              10               0               0              10
        Loans.......................................              20               0               0              20
        Guarantees..................................               0               0               0               0
    Home Affordable Modification Program............              50               0               0           xiv50
        Outlays.....................................          xiii50               0               0              50
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Automotive Industry Financing Program...........          xv78.2               0               0            75.4
        Outlays.....................................              59               0               0            75.4
        Loans.......................................            19.2               0               0            19.2
        Guarantees..................................               0               0               0               0
    Auto Supplier Support Program...................             3.5               0               0             3.5
        Outlays.....................................               0               0               0               0
        Loans.......................................          xvi3.5               0               0             3.5
        Guarantees..................................               0               0               0               0
    Unlocking SBA Lending...........................          xvii15               0               0              15
        Outlays.....................................              15               0               0              15
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Temporary Liquidity Guarantee Program...........               0               0             609             609
        Outlays.....................................               0               0               0               0
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0        xviii609             609
    Deposit Insurance Fund..........................               0               0            69.4            69.4
        Outlays.....................................               0               0         xix69.4            69.4
        Loans.......................................               0               0               0               0
        Guarantees..................................               0               0               0               0
    Other Federal Reserve Credit Expansion..........               0         1,261.2               0         1,261.2
        Outlays.....................................               0       xx1,069.5               0         1,069.5
        Loans.......................................               0        xxi191.7               0           191.7
        Guarantees..................................               0               0               0               0
    Uncommitted TARP Funds..........................           336.2               0               0           336.2
    ----------------------------------------------------------------------------------------------------------------
    iThe term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
      classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
      etc.). The outlays figures are based on: (1) Treasury's actual reported expenditures; and (2) Treasury's
      anticipated funding levels as estimated by a variety of sources, including Treasury pronouncements and GAO
      estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
      announcements, and are subject to further change. Outlays used here represent investment and asset purchases
      and commitments to make investments and asset purchases and are not the same as budget outlays, which under
      section 123 of EESA are recorded on a ``credit reform'' basis.
    iiAlthough many of the guarantees may never be exercised or exercised only partially, the guarantee figures
      included here represent the federal government's greatest possible financial exposure.
    iiiThis number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November 25,
      2008, and a $30 billion investment committed on April 17, 2009 (less a reduction of $165 million representing
      bonuses paid to AIG Financial Products employees). As of January 5, 2010, AIG had utilized $45.3 billion of
      the available $69.8 billion under the AIGIP/SSFI. This information was provided by Treasury in response to a
      Panel inquiry.
    ivThis number represents the full $35 billion that is available to AIG through its revolving credit facility
      with the Federal Reserve ($22.2 billion had been drawn down as of December 31, 2009) and the outstanding
      principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of December 31, 2009,
      $15.7 billion and $18 billion, respectively). Income from the purchased assets is used to pay down the loans
      to the SPVs, reducing the taxpayers' exposure to losses over time. Board of Governors of the Federal Reserve
      System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, at 17
      (Oct. 2009) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200910.pdf). On December
      1, 2009, AIG entered into an agreement with FRBNY to reduce the debt AIG owes the FRBNY by $25 billion. In
      exchange, FRBNY received preferred equity interests in two AIG subsidiaries. This also reduced the debt
      ceiling on the loan facility from $60 billion to $35 billion. American International Group, AIG Closes Two
      Transactions That Reduce Debt AIG Owes Federal Reserve Bank of New York by $25 billion (Dec. 1, 2009) (online
      at phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MjE40D18Q2hpbGRJRD0tMXxUeXB1PTM=&t=1).
    vBank of America repaid the $45 billion in assistance it had received through TARP programs on December 9, 2009.
      U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for Period Ending December
      30, 2009 (Jan. 4, 2010) (online at www.financialstability.gov/docs/transaction-reports/1-4-
      10%20Transactions%20Report%20as%20of%2012-30-09.pdf) (hereinafter ``TARP Transactions Report'').
    viAs of December 30, 2009, the U.S. Treasury held $25 billion of Citigroup common stock. See TARP Transactions
      Report, supra note v.
    viiThis figure represents the $218 billion Treasury has anticipated spending under the CPP, minus the $25
      billion investment in Citigroup ($25 billion) identified above, and the $121.9 billion in repayments that are
      reflected as available TARP funds. This figure does not account for future repayments of CPP investments, nor
      does it account for dividend payments from CPP investments.
    viiiOn November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
      need of further capital from Treasury. GMAC, however received further funding through the AIFP, therefore the
      Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding the
      Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
    ixThis figure represents a $20 billion allocation to the TALF SPV on March 3, 2009. See TARP Transactions
      Report, supra note vi. As of January 7, 2010, investors had requested a total of $64.3 billion in TALF loans
      ($9.2 billion in CMBS and $55 billion in non-CMBS). Federal Reserve Bank of New York, Term Asset-Backed
      Securities Loan Facility: CMBS (accessed Jan. 7, 2009) (online at www.newyorkfed.org/markets/
      CMBS_recent_operations.html); Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
      non-CMBS (accessed Jan. 7, 2009) (online at www.newyorkfed.org/markets/talf_operations.html).
    xThis number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value of
      Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability Plan
      (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial $20 billion
      Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential expansion to a
      $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Because Treasury is
      responsible for reimbursing the Federal Reserve Board for $20 billion of losses on its $200 billion in loans,
      the Federal Reserve Board's maximum potential exposure under the TALF is $180 billion.
    xiIt is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design as a
      joint Treasury-FDIC program to purchase troubled assets from solvent banks. See also Federal Deposit Insurance
      Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/
      news/news/press/2009/pr09084.html) and Federal Deposit Insurance Corporation, Legacy Loans Program--Test of
      Funding Mechanism (July 31, 2009) (online at www.fidc.gov/news/press/2009/pr09131.html). The sales described
      in these statements do not involve any Treasury participation, and FDIC activity is accounted for here as a
      component of the FDIC's Deposit Insurance Fund outlays.
    xiiU.S. Department of the Treasury, Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman
      of the Board of Governors of The Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit
      Insurance Corporation Sheila Bair: Legacy Asset Program (July 8, 2009) (online at www.financialstability.gov/
      latest/tg_07082009.html) (``Treasury will invest up to $30 billion of equity and debt in PPIFs established
      with private sector fund managers and private investors for the purpose of purchasing legacy securities.'');
      U.S. Department of the Treasury, Fact Sheet: Public-Private Investment Program, at 4-5 (Mar. 23, 2009) (online
      at www.treas.gov/press/releases/reports/ppip_fact_sheet.pdf) (outlining that, for each $1 of private
      investment into a fund created under the Legacy Securities Program, Treasury will provide a matching $1 in
      equity to the investment fund; a $1 loan to the fund; and, at Treasury's discretion, an additional loan up to
      $1). As of December 30, 2009, Treasury reported $19.9 billion in outstanding loans and $9.9 billion in
      membership interest associated with the program, thus substantiating the Panel's assumption that Treasury may
      routinely exercise its discretion to provide $2 of financing for every $1 of equity 2:1 ratio. TARP
      Transactions Report, supra note v.
    xiiiU.S. Government Accountability Office, Troubled Asset Relief Program; June 2009 Status of Efforts To Address
      Transparency and Accountability Issues, at 2 (June 17, 2009) (GAO09/658) (online at www.gao.gov/new.items/
      d09658.pdf). Of the $50 billion in announced TARP funding for this program, $35.5 billion has been allocated
      as of December 30, 2009. See TARP Transactions Report, supra note v.
    xivFannie Mae and Freddie Mac, government-sponsored entities (GSEs) that were placed in conservatorship of the
      Federal Housing Finance Housing Agency on September 7, 2009, will also contribute up to $25 billion to the
      Making Home Affordable Program, of which the HAMP is a key component. U.S. Department of the Treasury, Making
      Home Affordable: Updated Detailed Program Description (Mar. 4, 2009) (online at www.treas.gov/press/releases/
      reports/housing_fact_sheet.pdf).
    xvSee TARP Transactions Report, supra note v. A substantial portion of the total $81 billion in loans extended
      under the AIFP have since been converted to common equity and preferred shares in restructured companies.
      $19.2 billion has been retained as first lien debt (with $6.7 billion committed to GM, $12.5 billion to
      Chrysler). This figure ($78.2 billion) represents Treasury's current obligation under the AIFP after
      repayments.
    xviSee TARP Transactions Report, supra note v.
    xviiU.S. Department of Treasury, Fact Sheet: Unlocking Credit for Small Businesses (Oct. 19, 2009) (online at
      www.financialstability.gov/roadtostability/unlockingCreditforSmallBusinesses.html) (``Jumpstart Credit Markets
      For Small Businesses By Purchasing Up to $15 Billion in Securities'').
    xviiiThis figure represents the current maximum aggregate debt guarantees that could be made under the program,
      which, in turn, is a function of the number and size of individual financial institutes participating. $313
      billion of debt subject to the guarantee has been issued to date, which represents about 51 percent of the
      current cap, Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
      Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Nov. 30, 2009) (online at www.fdic.gov/
      regulations/resources/TLGP/total_issuance11-09.html) (updated Jan. 4, 2010). The FDIC has collected $10.3
      billion in fees and surcharges from this program since its inception in the fourth quarter of 2008. Federal
      Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee
      Program (Nov. 30, 2009) (online at www.fdic.gov/regulations/resources/TLGP/fees.html) (updated Jan. 4, 2010).
    xixThis figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
      failures in the third and fourth quarters of 2008 and the first, second and third quarters of 2009. Federal
      Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income Statement
      (Fourth Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_4qtr_08/income.html);
      Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF Income
      Statement (Third Quarter 2008) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_08/
      income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
      Income Statement (First Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_1stqtr_09/
      income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
      Income Statement (Second Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_2ndqtr_09/
      income.html); Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to the Board: DIF
      Income Statement (Third Quarter 2009) (online at www.fdic.gov/about/strategic/corporate/cfo_report_3rdqtr_09/
      income.html). This figure includes the FDIC's estimates of its future losses under loss-sharing agreements
      that it has entered into with banks acquiring assets of insolvent banks during these four quarters. Under a
      loss-sharing agreement, as a condition of an acquiring bank's agreement to purchase the assets of an insolvent
      bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future losses on an initial portion
      of these assets and 95 percent of losses of another portion of assets. See, for example Federal Deposit
      Insurance Corporation, Purchase and Purchase and Assumption Agreement Among FDIC, Receiver of Guaranty Bank,
      Austin, Texas FDIC and Compass Bank at 65-66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/
      guaranty-tx_p_and_a_w_addendum.pdf). In information provided to Panel staff, the FDIC disclosed that there
      were approximately $132 billion in assets covered under loss-sharing agreements as of December 18, 2009.
      Furthermore, the FDIC estimates the total cost of a payout under these agreements to be $59.3 billion. Since
      there is a published loss estimate for these agreements, the Panel continues to reflect them as outlays rather
      than as guarantees.
    xxOutlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
      accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
      Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
      (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Jan. 4, 2010). Although the
      Federal Reserve does not employ the outlays, loans and guarantees classification, its accounting clearly
      separates its mortgage-related purchasing programs from its liquidity programs. See Board of Governors of the
      Federal Reserve, Credit and Liquidity Programs and the Balance Sheet November 2009, at 2 (online at
      www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf) (accessed Dec. 7, 2009).
    xxiFederal Reserve Liquidity Facilities classified in this table as loans include: Primary credit, Secondary
      credit, Central bank liquidity swaps, Primary dealer and other broker-dealer credit, Asset-Backed Commercial
      Paper Money Market Mutual Fund Liquidity Facility, Net portfolio holdings of Commercial Paper Funding Facility
      LLC, Seasonal credit, Term auction credit, Net Portfolio Holdings of TALF LLC, and loans outstanding to Bear
      Stearns (Maiden Lane I LLC). Board of Governors of the Federal Reserve System, Factors Affecting Reserve
      Balances (H.4.1) (online at www.federalreserve.gov/datadownload/Choose.aspx?rel=H41) (accessed Jan. 4, 2010);
      see id.

                       SECTION FIVE: OVERSIGHT ACTIVITIES

        The Congressional Oversight Panel was established as part
    of the Emergency Economic Stabilization Act (EESA) and formed
    on November 26, 2008. Since then, the Panel has produced
    thirteen oversight reports, as well as a special report on
    regulatory reform, issued on January 29, 2009, and a special
    report on farm credit, issued on July 21, 2009. Since the
    release of the Panel's December oversight report, which
    assessed the performance of the Troubled Asset Relief Program
    (TARP) since its inception, the following developments
    pertaining to the Panel's oversight of the TARP took place:
         The Panel held a hearing in Washington, DC with
    Secretary of the Treasury Timothy Geithner on December 10, his
    third appearance before the Panel. Secretary Geithner answered
    questions relating to the Panel's December oversight report,
    discussed the TARP exit strategy, and provided an overview of
    how the TARP would be used as it is extended into 2010.
    Secretary Geithner has agreed to testify before the Panel once
    per quarter.

    Upcoming Reports and Hearings

        The Panel will release its next oversight report in
    February. The report will address the TARP's role in mitigating
    continued concerns about the commercial real estate market.
        The Panel is planning a field hearing in Atlanta on January
    27, 2010. The hearing will discuss the implications of the
    troubled commercial real estate market on sustained financial
    stability.
              SECTION SIX: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL

        In response to the escalating crisis, on October 3, 2008,
    Congress provided Treasury with the authority to spend $700
    billion to stabilize the U.S. economy, preserve home ownership,
    and promote economic growth. Congress created the Office of
    Financial Stability (OFS) within Treasury to implement the
    Troubled Asset Relief Program. At the same time, Congress
    created the Congressional Oversight Panel to ``review the
    current state of financial markets and the regulatory system.''
    The Panel is empowered to hold hearings, review official data,
    and write reports on actions taken by Treasury and financial
    institutions and their effect on the economy. Through regular
    reports, the Panel must oversee Treasury's actions, assess the
    impact of spending to stabilize the economy, evaluate market
    transparency, ensure effective foreclosure mitigation efforts,
    and guarantee that Treasury's actions are in the best interests
    of the American people. In addition, Congress instructed the
    Panel to produce a special report on regulatory reform that
    analyzes ``the current state of the regulatory system and its
    effectiveness at overseeing the participants in the financial
    system and protecting consumers.'' The Panel issued this report
    in January 2009. Congress subsequently expanded the Panel's
    mandate by directing it to produce a special report on the
    availability of credit in the agricultural sector. The report
    was issued on July 21, 2009.
        On November 14, 2008, Senate Majority Leader Harry Reid and
    the Speaker of the House Nancy Pelosi appointed Richard H.
    Neiman, Superintendent of Banks for the State of New York,
    Damon Silvers, Director of Policy and Special Counsel of the
    American Federation of Labor and Congress of Industrial
    Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
    Professor of Law at Harvard Law School to the Panel. With the
    appointment on November 19, 2008, of Congressman Jeb Hensarling
    to the Panel by House Minority Leader John Boehner, the Panel
    had a quorum and met for the first time on November 26, 2008,
    electing Professor Warren as its chair. On December 16, 2008,
    Senate Minority Leader Mitch McConnell named Senator John E.
    Sununu to the Panel. Effective August 10, 2009, Senator Sununu
    resigned from the Panel, and on August 20, 2009, Senator
    McConnell announced the appointment of Paul Atkins, former
    Commissioner of the U.S. Securities and Exchange Commission, to
    fill the vacant seat. Effective December 9, 2009, Congressman
    Jeb Hensarling resigned from the Panel and House Minority
    Leader John Boehner announced the appointment of J. Mark
    McWatters to fill the vacant seat.
     APPENDIX I: LETTER FROM SECRETARY TIMOTHY GEITHNER TO CHAIR ELIZABETH
               WARREN, RE: STRESS TESTS, DATED DECEMBER 10, 2009

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     APPENDIX II: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY
         GEITHNER, RE: EXECUTIVE COMPENSATION, DATED DECEMBER 24, 2009

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     APPENDIX III: LETTER FROM CHAIR ELIZABETH WARREN TO SECRETARY TIMOTHY
           GEITHNER, RE: CIT GROUP ASSISTANCE, DATED JANUARY 11, 2010

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